Japan, Australia Inject $11 Billion to Combat Rising Money Market Rates

Even with Japan’s banks largely on the sidelines in the international housing bubble (US subprime exposure is a mere $8 billion), its money markets are suffering the effects of the flight from risk. Both Japan and Australia pumped more funds into their markets to combat banks’ unwillingness to lend to each other.

From Bloomberg:

Japan and Australia’s central banks pumped more than $11 billion into the financial system seeking to ease money-market rates that were close to record highs as banks hoard cash on concern about a global recession.

The Bank of Japan injected 1 trillion yen ($9.8 billion) and the Reserve Bank of Australia added A$1.815 billion ($1.3 billion). The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans stayed near a nine-month high. The Japanese Libor-OIS spread, a gauge of cash scarcity among banks, rose to a record.

“There’s a massive asset bubble deflating and it just encompasses everything,” said Adam Carr, senior economist in Sydney at ICAP Australia Ltd., part of the world’s largest inter-bank broker. “We’ve been living in a dreamland and that dream has ended.”

Interbank rates have jumped as banks store cash to bolster balance sheets as share and commodity prices plunge after governments in Europe and the U.S. arranged rescues for six financial institutions in the past two weeks. The Nikkei 225 Stock Average sank below 10,000 for the first time since December 2003 as Asian stocks slumped for a fourth day, extending an equities rout that erased about $2.5 trillion from global shares yesterday.

Banks increased deposits held at the Reserve Bank of Australia by A$92 million to A$9.493 billion yesterday, after those holdings reached a record A$11.04 billion on Sept. 30, the RBA said today on its Web site. Those deposits averaged A$1.7 billion last year.

Borrowing Costs

Australian banks’ borrowing costs were little changed after the injection, according to a gauge that measures the availability of funds in the market. The difference between the rate banks charge each other for three-month loans and the overnight indexed swap rate stood at 86 basis points, or 0.86 percentage point, from 88.3 before the RBA operation. The gap has averaged 45 points this year.

Banks hold cash in RBA exchange settlement accounts, on- call deposits at the central bank that receive interest at 0.25 percentage point below the central bank’s benchmark rate.

RBA Governor Glenn Stevens will lower the cash target rate to 6.5 percent from 7 percent, according to 16 of 21 economists surveyed by Bloomberg before the decision due at 2:30 p.m. today in Sydney.

Credit Crunch

The cost of protecting investors from Australian corporate bond defaults increased to a record.

The Markit iTraxx Australia index rose 34 basis points to 245, according to prices from Citigroup Inc. The price of the contracts, tied to the debt of 25 companies including Qantas Airways Ltd. and BHP Billiton Ltd., is the highest since the iTraxx benchmarks started in 2004. Sydney trading desks were closed yesterday for a holiday.

The Markit iTraxx Japan index rose 9 basis points to 207, Morgan Stanley prices show.

“Credit markets remain extremely weak and fragile,” Gus Medeiros, a credit analyst at Deutsche Bank AG in Sydney, wrote in a research note today. “We expect the market to remain very volatile and thin in the next few days.”

Damage from the credit crunch accelerated over the past month as Lehman Brothers Holdings Inc. and Washington Mutual Inc. collapsed, the U.S. government took control of Fannie Mae, Freddie Mac and American International Group Inc., and Merrill Lynch & Co. and Wachovia Corp. were purchased by rivals.

U.S. Bailout

The U.S. dollar Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, stood at 287 basis points today, after touching 298 points yesterday. It was at 129 basis points two weeks ago and 81 basis points a month ago. The Japanese Libor-OIS spread widened to a record 61.05 basis points.