Yet another indicator of the seriousness of the Northern Rock crisis: UK overnight rates increased 60 basis points on liquidity concerns. As Bloomberg reports:
The cost of overnight borrowing in pounds rose the most since June as the bailout of U.K. lender Northern Rock Plc stoked concern other home-loan providers will be forced to seek emergency funding.
The overnight rate banks charge to lend pounds soared 60 basis points to 6.47 percent today, the highest in more than a month, according to the British Bankers’ Association. The three- month rate fell 7 basis points to 6.75 percent, the BBA said.
The increase suggests a drought in lending for three months or more is forcing banks to depend on overnight borrowing. Northern Rock required emergency financing because it relies on the capital markets rather than deposits for 73 percent of its funds.
“Investors and market players are very worried, especially after Northern Rock,” said Nathalie Fillet, senior interest- rate strategist at BNP Paribas SA in London. “A lot of earnings from banks will be coming out soon and that will give us a clearer indication of whether it’s a more widespread problem.”
Rising lending costs have left the gap between three-month rates and the Bank of England’s benchmark rate, currently at 5.75 percent, near the widest in at least two decades.
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Just to pin down this for history, the first money-market squeeze in the current episode was for the GBP overnight at the end of June, when the overnight shot up to (approximately) 7% from 5%. The GBP, not the USD, has been leading this thing.