European Lending Rates Jump
Key bank to bank long term lending rates in Europe jumped to their highest since 1995 from 5.142 to 5.237 a move sure to reverberate through Interbank Forex markets. The six month rate also jumped to 5.315 from a former rate of 5.290. European rates are fixed by the European Central Bank. (Euribor) It is becoming painfully obvious that the financial crisis is not limited to the US.
The Contagion Spreads
The US financial crisis has become contagious, spreading to European banks and financial institutions and Interbank Forex markets worldwide. In the UK mortgage giant Bradford and Bingley had to be rescued by the government. Shares of French bank Dexia tumbled more than 20% because of a newspaper report that the bank may launch an emergency capital increase. On Sunday the governments of Belgium, Luxembourg, and the Netherlands announced an 11.2 Euro bailout of one of Europe’s largest banks.
Highlights of the US Bailout Plan
Markets, including the Interbank Forex, have been in a state of disarray with global money markets waiting for the details of the proposed US bailout. The US congress is set to vote on the compromise bailout package on Monday, September 29th. After almost a week of political haggling Democrats and Republicans have reached an agreement. Highlights of the bailout plan include;
- The government would have broad powers to buy billions in mortgage related assets.
- The plan lets congress block half the money. The government can access 250 billion immediately, 100 billion more if the president certified it was necessary, and 350 billion more with a separate certification.
- Executives of companies who benefit from the bailout will see limited compensation.
- The plan requires the government to try to renegotiate bad mortgages with the intention of lowering monthly payments.
- The government would receive stock warrants in return for assistance, giving American taxpayers the opportunity to share in future profits.
- After five years the government would submit a plan to congress on how to recover any losses from companies receiving assistance.
Financial analysts are hoping that the passage of the US bailout plan will bring a semblance of stability to global markets. With the crisis spreading well beyond the borders of the United States passage of the compromise bailout plan is seen by many as a way to stem the tide of bank failures in Europe. Credit markets and interbank forex lending have all been virtually frozen by the US financial crisis and it is hoped that the infusion of billions of dollars will cause credit to flow freely again. It is hoped that the bailout and other recent actions of the Fed will shore up the US dollar on both retail and interbank Forex markets.
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