Thrifty Loans

Fears sprang anew in the financial markets this week as top banks were said to be hoarding money to cover the risk of further possible losses due to the sub-prime crisis.

The three-month bank loan rate was up in London on Monday, to 6.45%, much higher than the Bank of England base rate of 5.75%. Liquidity in the money markets is running dry again, and overnight loan rates also went up.

The spark that lit the fires of these jitters was a worry that ‘monoline’ insurers could be in trouble or at least find their credit ratings being cut. These firms insure instruments of debt such as sub-prime linked securities, and they give credit ratings to investments.

However, now the monocline firms might find their own credit ratings will be downgraded because of their exposure to the problems caused by sub-prime mortgages. The knock-on effect was quickly calculated by the money men, with insurance covering billions of pounds worth of securities, and potentially a new wave of investment bank hits.

Monolines were said to be under review by both Moody’s Investors Service and Fitch Ratings – both ratings agencies.

One leading asset manager forecast that any downgrade would send out a severe shock wave.

Defaulting mortgages in America have already caused big players such as Merrill Lynch, Morgan Stanley, Citigroup and Barclays to slash the value of securities on their books. Earlier this week Goldman Sachs advised its investors to sell shares in Citigroup due to the possibility that it may suffer £7bn of writedowns in the next six months. The result of that advice was a dive on Wall Street.

Big banks are hanging on to more cash to cover the risk of problems with their accounts, or to support investment vehicles they have set up. It is also probable that they are hoarding liquidity because towards the end of the financial year the demand for cash often rises.