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Credit crunch sees cost of funding soar Back  
Cost of credit for Irish corporates continues to rise.
Activity amongst Irish corporates is expected to slow over the coming months, as the rising cost of credit puts a halt to expansion plans. In early September, the London Interbank Offered Rate (Libor) reached a twenty-year high, a further sign of continuing unease in the money markets due to the on-going credit crisis.

As a result, corporates are paying an extra 40-50 bps on their funding, as banks, who are being hurt by the squeeze on liquidity, put up their lending rates.

John Coffey, Head of Treasury ALM with BNP Paribas, says that while Libor rates are still being published, they are not being used, because banks are hoarding liquidity for their own needs and are thus less willing to lend to other banks.This is particularly the case he says for banks who have had substantial standby facilities for SPVs & SIVs which now have to be taken onto their own balance sheets,thus straining both their liquidity & capital ratios.

‘In a normal functioning market, a major bank could go to another bank or broker and get valid prices for any period out to a year. But, since the credit crisis, the Libor rates quoted are more of a guesstimate and very little business is actually being done,’ he says.

Previously, well rated banks could have expected to borrow money at below Libor – now Irish banks are having to pay 20 bp above it.

The banks which are being really hit by the lack of liquidity are those which are more dependent on wholesale funding. This is evident in the case of Northern Rock, which only raises around 25 per cent of its funding requirements from its retail deposit base, and has been severely hit by the lack of available funding on the inter-bank market. The credit crisis and the issues surrounding banks such as Northern Rock are also leading to a ‘flight to quality’ says Coffey, as those institutions with surplus cash look to move their money into safer options.

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