Washington talks are key to future of global finance

Published on Saturday 11 October 2008 00:34

WORLD finance ministers were last night under growing pressure to intervene to bring down the crucial inter-bank lending rate as it continued to rise despite the massive injections of government funds into the financial system.

The measure of the levels of trust between British banks fell further yesterday with the three and six-month London interbank overnight rates (Libor) climbing again to 6.285 per cent and 6.38 per cent.

Dollar interbank lending rates over three and six months also climbed, although euro rates eased marginally.

Last night some analysts predicted that even more massive, co-ordinated government action was the only thing that will get Libor to come down.

Rates, which have stubbornly refused to come down despite promise to inject 400 billion into the UK system – and similar moves around the world – are likely to be on the agenda as the G7 finance ministers meet in Washington this weekend.

"If, and it is a big if, leaders can deliver a promise to collectively inject public funds into all of their national banking systems, then markets might just start to regain some confidence," said John Higgins at Capital Economics. "A global agreement to guarantee interbank lending both within and across national borders is the other missing piece in the jigsaw."

And City commentator David Buik of BCG Partners warned the banks were unlikely to be convinced to lend more easily unless the G7 nations agreed to guarantee Libor lending.

"Right now there's no money changing hands, there's no trust."

Interbank lending rates express the degree of confidence banks have in the financial sector.

If they think a fellow bank might collapse, they will not lend but just sit on their cash.

Central banks around the world attempted to take united action this week, but concern in the sector has deepened since the collapse of the Icelandic banking system.

Meanwhile, Barclays officially confirmed yesterday that it was seeking to raise cash from the market instead of from the government.

It is thought to be speaking to some of the world's largest sovereign funds, including existing investors such as Qatar Investment Authority, China Development Bank and Japan's Sumitomo Mitsui Financial Group.

If it fail, Barclays will take up the cash from the government, but that would require it to agree to conditions such as paying its dividends in shares.

While it is unclear how much Barclays needs to raise analysts are predicting the bank should raise 3-5bn, around half of the amount Royal Bank of Scotland is expected to raise.

RBS has confirmed it will participate in the recapitalisation scheme but has not said in what form, claiming it is awaiting further details. Shares across the banking sector plunged as part of a wider collapse in equities yesterday, with RBS dropping 24.3p to 71.7p, while HBOS dropped 29.3p to 124.2p.