Credit market strains hang on banks results

By John Parry

NEW YORK (Reuters) - Credit market strains may start to abate in early 2008 once banks get through the next round of revealing losses from riskier assets, fund managers at the Reuters Investment Outlook 2008 Summit said this week.

Central banks' plan, unveiled on Wednesday, to add temporary reserves may also help to cushion the global banking system from shocks of more losses from the melt down in U.S. subprime mortgages. But for elevated short-term borrowing costs to come down substantially, market participants need a more up-to-date tally of how much red ink the banking system has bled, fund managers said.

Until then, the specter of uncertainty about banks' unknown losses in credit markets will likely haunt banks and clam up lending. Banks' financial results issued in early 2008 may be ugly, but investors will be relieved to know the worst.

Tom Sowanick, chief investment officer with Clearbrook Financial LLC in Princeton, New Jersey, said concerns about the structured credit that banks and brokerage firms own, "will come to a rest by the end of the first quarter or the end of the second quarter at the latest because (by then) many financial firms report and they won't hide that from their auditors."

For now, banks are hoarding cash to cushion themselves against the risk of more write downs and against so called "counterparty risk" in interbank lending markets: the danger that a borrower might not be able to repay a short-term loan. These trends have kept short term lending rates atypically high since credit market turmoil erupted in August.

Libor, or the London interbank offered rate, is some 75 basis points above the federal funds target rate, the key U.S. overnight lending rate. That's way above its historical long term average of within about 12.5 basis points, analysts note.

Libor, the main short term borrowing rate in Europe and for adjustable-rate mortgages in the United States, is likely to remain high into the first quarter, said Deborah Cunningham, who manages Federated Investors U.S. and euro money market funds totaling $210 billion in assets.

In Europe, "banks are not trustworthy of each other" in short term lending markets, said Cunningham, who chief investment officer for taxable money markets at Federated Investors Inc.  Continued...