Business and Finance

The cost of borrowing overnight dollars on global money markets soared on Tuesday despite central banks pumping billions into the banking system to prevent it seizing up further after U.S. lawmakers’ rejection of a $700 billion financial rescue bill panicked markets.

The scramble for cash as banks sought to square their books over the end of the quarter saw the European Central Bank lend $30 billion dollars overnight at a huge rate of 11 percent — more than five times the Federal Reserve’s 2 percent target rate — and call for bids for an additional $50 billion.

Meanwhile, the London interbank offered rate (Libor) for overnight dollars jumped by a record 430 basis points to 6.87 percent, the highest in at least 7-1/2 years.

After the U.S. House of Representatives late on Monday rejected the $700 billion rescue package and sent Wall Street shares plunging, fears of further meltdown in Europe grew.

But in part buoyed by the Irish government’s decision to guarantee all bank deposits and speculation central banks could cut interest rates in concert soon, a collapse of European equities failed to materialize.

European shares erased initial losses to trade largely flat on the day and U.S payday loan low fee. stock futures pointed to a higher opening on Wall Street.

“Money markets are more of a problem than stock markets. Perceived counterparty credit risk … probably won’t go away for a while,” said Everett Brown, strategist at IDEAGlobal.

He said interbank rates and premia over government borrowing costs and expected policy rates — key gauges of financial market stress and investor risk aversion — should come down from historically high levels in the coming sessions. 

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