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Barclays SWF Cash Call, Nationwide Mortgage Interest Rate Hikes

Companies / Credit Crisis 2008 Jun 16, 2008 - 06:20 PM GMT

By: Nadeem_Walayat

Companies Best Financial Markets Analysis ArticleOne of Britain's biggest banks, Barclays after weeks of cash call rumours finally looks set to follow the rest of the banking sector in another cash call rights issue that aims to raise £4 billion from investors in an attempt to improve the banks balance sheet in the face of a deepening credit crisis. Barclays may even go so far as using some of the cash raised to bid for Bradford & Bingley which has seen its share price collapse from £4.50 to as low as 60p, however I personally doubt it will.


Active on the list of share recipients will be the Chinese and Singapore Sovereign Wealth funds that have been busy picking up large chunks of prime western real estate under distressed and politically subdued conditions. The sovereign wealth funds are akin to wolfs in sheeps clothing that are being welcomed by distressed bleating financial institutions and panicky central bankers seeking alternatives to state intervention. However many of the SWF's such as the China Development bank are new kids on the block and may not actually have the skills to make profitable investments, afterall the CDB has seen its original stake in Barclays halve in value. Off course as I warned in the article (Sovereign Wealth Funds - Saviours or Harbingers of Economic Apocalypse? ) , there's more to stake building then investment return, as the Emerging Giants seek to obtain insurance policies against the repercussions of the future dash for resource conflicts.

Meanwhile, Britains biggest building society the Nationwide, again increased its mortgage interest rates by a 0.5%, this despite no change by the Bank of England and concerted government pressure for banks to cut interest rates to home borrowers which has been sweetened by £100 billion of tax payer money in the form of UK government bonds in exchange for mortgage backed junk securities. Whilst not immediately affecting existing borrowers, this does however follow the trend of deterring other banks mortgage borrowers from remortgaging to the Nationwide. Its an exact mirror image of what is happening on the LIBOR market as the Nationwide is unable to borrow at rates that enable the building society to cover loans, costs and bad debts that are expected to grow substantially inline with the worsening housing market situation.

The below graph of LIBOR, the UK interbank money market basically shows that the banks are not lending to one another by setting market rates well beyond the base rate. The situation is even worse than which appears on face value, as the actual LIBOR rate has been discredited due to the way it is compiled which implies that banks actually quote lower rates then traded on the LIBOR market so as to imply the credit crisis has had less of an impact on the institution then it has. Apart from the credit crunch backdrop, the developing situation is further worsened due to the triple effects of slowing economy, falling house prices and rising inflation, which all point to an increase in risks and potential for bank defaults.

Those that benefit from the current credit climate are savers, fixed interest rate bonds are again appearing touching the magic 7% level after last making a brief appearance in October 2007. one of the first to start the latest ball rolling is the Yorkshire Building Society with a 2 year fixed rate savings bond paying 7%. Given the inflationary environment and deteriorating interbank market that is not going to go away any time soon, savers can expect the distressed banks to continue to offer better rates to savers to get cash through their doors.

By Nadeem Walayat

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Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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