Money markets still not ready to nurture economy

[Joanne98]

LONDON (Reuters) - Bank-to-bank lending, the lifeblood of the financial system, has made only a partial recovery from a seizure that paralysed money markets and still lacks the strength required to nurse economies back to health.

Massive cash injections by central banks have relieved the worst of the symptoms, while swingeing reductions in official interest rates to record lows have slashed actual bank-to-bank lending rates.

But banks are still charging each other an unhealthily wide premium over a near risk-free benchmark rate that is linked to market expectations of central bank interest rates.

This may not be surprising given banks are still laden with dubious debt accumulated over years when credit and housing market bubbles inflated each other.

Yet increasing and cheapening the flow of funds between banks will be vital to ensuring that banks in turn give companies and consumers the credit they need to stop a global recession turning into the next Great Depression.

"It's good to see more stable money markets, but the very fact that these risk premia remain still at relatively high levels indicate that we're far from out of the woods yet," said Don Smith, economist at ICAP in London.

"It's not dysfunctional but it is a difficult market still."

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http://uk.reuters.com/article/stocksNews/idUKLNE51F01120090216