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Money Market Stress Surges as Stocks Rout on Growth Concerns

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European Central Bank President Jean-Claude Trichet
Over opposition from Germany’s Bundesbank, European Central Bank President Jean-Claude Trichet yesterday sent the ECB back into bond markets as yields on Italian and Spanish yields soared, threatening the ability of the euro region’s third- and fourth-largest economies to borrow. Photographer: Hannelore Foerster/Bloomberg

Aug. 5 (Bloomberg) -- Gauges of stress in money markets surged to the highest in at least a year as stocks and commodities tumbled on concern the global economic recovery is faltering.

The TED spread, the difference between what lenders and the U.S. government pay to borrow for three months, widened to 26.4 basis points in London today, the most since Aug. 5. A gauge of bank funding stress in Australia climbed to 47 basis points, the highest since March 2009.

Investors are fleeing riskier assets as policy makers in the U.S. and Europe grapple with debt crises amid signs of slowing economic growth. While signs of money-market turmoil are increasing, they remain far below the levels reached as the collapse of Lehman Brothers Holdings Inc. sparked a global credit freeze in 2008.

“I don’t think we’re out of control yet,” said Adam Carr, senior economist in Sydney at ICAP Australia Ltd., part of the world’s largest interdealer broker. “The market’s telling you it’s afraid, but we’re not beyond the point of no return.”

The TED Spread peaked at 463 basis points on Oct. 10, 2008. In Australia, the gap between the interest banks pay to borrow from each other for three months and swaps that track expectations for the central bank’s benchmark rate reached as high as 144 basis points on Oct. 7 the same year.

Europe Crisis

Over opposition from Germany’s Bundesbank, European Central Bank President Jean-Claude Trichet yesterday sent the ECB back into bond markets as yields on Italian and Spanish yields soared, threatening the ability of the euro region’s third- and fourth-largest economies to borrow.

As the sell-off continued, traders said the ECB purchased only Irish and Portuguese securities, suggesting the central bank is reluctant to put up the funds needed to tame a crisis it says governments are responsible for fixing.

The three-month Euribor-OIS spread, a gauge of banks’ reluctance to lend, rose to 55.3 basis points in London today, the most since May 18, 2009.

The Standard & Poor’s 500 Index plunged 4.8 percent yesterday to an eight-month low. U.S. options prices soared the most in four years and volume jumped to a record 35 million contracts as investors rushed to buy protection against greater stock-market losses.

Consumer confidence in the U.S. dropped last week to the lowest level in more than two months amid political wrangling over raising the debt ceiling and a stagnant job market.

The turmoil in financial markets is due to political “incompetence” in Europe and the U.S., and global economic growth prospects still look solid, said Carr.

“Markets are nervous, people are nervous, and the problem is, there’s no real catalyst for it,” he said. “This is fear driving fear, and as we saw in 2008, that can have devastating consequences.”

To contact the reporter on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net.

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net.

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