UK Insurers Plunge, BoE Adds Liquidity

123jump.com Staff
16 Oct, 2008
New York City

The Bank of England offered liquidity of $254 billion to money markets in UK to restore interbank lending and lower overnight rates. The move only adds to the total government and the BoE intervention of $3 trillion. However, the interbank lending rates are falling but only gradually.

[R]1:00PM New York, 6:00PM London – The Bank of England injects $254 billion in money market. The Swiss government offers $60 billion bailout package for UBS. Credit Suisse raises $10 billion from private investors.[/R]

U.K. stocks dropped as commodity stocks plummeted on concern the slowing global economy will affect demand.

Insurance companies fell after Goldman Sachs expressed negative comments on Prudential Plc and Aviva Plc. Old Mutual dropped 22% or 13.70 pence to 49.60 and Prudential Plc plunged 19.5% or 72 pence to 297.75. Aviva Plc dropped 9.9% or 39 pence to 353 pence.

Market Sentiment

In London trading FTSE 100 plunged 5.35% or 218.2 to 3,861.39 and the index is down 39% for the year.

Of the FTSE 100 index shares 8 rose, 92 declined, and 2 were unchanged. Rexam led advancers in the index shares with a rise of 4.47% followed by 1.2% rise in Centrica Plc.

BoE Injects $254 billion in Money Market

The Bank of England today injected $254 billion in the money market as part of an emergency intervention to thaw a freeze in interbank lending.

After the move, the British Bankers’ Association reported that the London interbank offered rate, or Libor, for three-month loans in dollar dropped by 5 basis points to 4.50%.

The bank will also establish a Discount Window Facility where financial institutions may borrow gilts or cash at their discretion against a wide range of eligible collateral to provide liquidity insurance to commercial banks.

In addition, the BoE will introduce permanent long-term repo open market auction where counterparties bid separately against a range of collateral. The adjustments will take effect on October 20.

Governor of the Bank of England, Mervyn King, said, “These arrangements set out our liquidity provision in a systematic way to help banks plan access to central bank liquidity and so add certainty.”

The Swiss National Bank Offers $60 Billion Bailout to UBS

Switzerland acted today to provide capital and takeover risky bonds from UBS. This week the central bank in coordination with the Fed agreed to provide unlimited dollar liquidity to local institutions, in preparation of the current bailout. UBS will transfer nearly $60 billion of illiquid, subprime-linked mortgage securities to a fund controlled by the Swiss National Bank.

The SNB will loan $54 to the new fund that will hold the assets and will receive a share in profit on the sale of securities and interest rate of 2.5% above the one-month London Interbank Offered Rate.

UBS AG will also sell Sfr 6 billion in mandatory convertible notes with 12.5% interest rates which will convert to 9.3% stake in the private banking group.

Marcel Rohner, chief executive in a presentation to investors said that after the transfer the bank will hold $4.7 billion of loans to leveraged buyouts and $4.3 billion contracts linked to bond insurance.

Credit Suisse Raises Capital

Credit Suisse reported a loss of Sfr 1.3 billion for the quarter ending in September on a loan loss of Sfr 2.4 billion in leveraged loans. The banker plans to sell Sfr 3.2 billion in shares, Sfr 1.7 billion in bonds and Sfr 5.5 billion in hybrid bond that is part of its reserve capital. In all the investment banker will raise from the existing shareholders a total of Sfr 10.4 billion.

Gainers & Losers

Rexam led advancers in the FTSE 100 index shares with a rise of 4.47% followed by increases in Centrica Plc of 1.24%, in Severn Trent of 0.80%, in National Grid of 0.55%, and Drax Group of 0.51%.

Thomas Cook led decliners in the FTSE 100 index shares with a fall of 23.26% followed by losses in TUI Travel of 22.2%, in Old Mutual of 21.7%, in Prudential Plc of 19.5%, and Wolseley Plc of 17.6%.

Commodity stocks fell on concern the global economy is sliding into recession. Vedanta Resources shed 15.21%, Kazakhmys of 14.10% and Xstrata of 13.61%.

Europe Markets Review

In London FTSE 100 Index closed lower 218.20 or 5.35% to 3,861.39, in Paris CAC 40 Index decreased 200.07 or 5.92% to close at 3,181.00 and in Frankfurt DAX index lower 238.82 or 4.91% to close at 4,622.81. In Zurich trading SMI decreased 192.64 or 3.26% to close at 5,718.53.