Libor Fails to Drop From 7-Year High; Crunch Persists - This article by Gavin Finch for Bloomberg covers the bearish sentiment still evident in the credit markets. Here is a section:

The interest rates banks charge each other for short-term loans in Europe failed to decline from the highest levels in seven years a day after central banks joined forces to break a logjam in money markets.

The cost to borrow for three months remained at 4.95 percent, the British Bankers' Association said today. That's 95 basis points, or 0.95 percentage point, more than the European Central Bank's benchmark interest rate, compared with 57 basis points a month ago. The difference averaged 25 basis points in the first half of the year, before losses on securities linked to U.S. subprime mortgages contaminated credit markets.

The highest short-term rates since December 2000 suggest that the first coordinated central bank action since the Sept. 11, 2001, terrorist attacks may not be enough to revive interbank lending. The cost of borrowing dollars fell 7 basis points to 4.99 percent, about half what was anticipated, based on prices of Libor futures contracts.

``It's not going to help us find an exit to this crisis,'' said Cyril Beuzit, head of interest-rate strategy at BNP Paribas SA in London. ``These measures aren't going to address the root cause of the crisis. Banks are still reluctant to lend money to each other because there are serious concerns about potential further bad news.''

Reacting to Losses

Central banks in the U.S., U.K., Canada, Switzerland and the euro region agreed yesterday to coordinate efforts to promote lending and restore confidence in money markets. Policy makers are reacting to more than $66 billion of losses announced by banks this year and estimates of about $300 billion more on securities linked to subprime mortgages, collateralized-debt obligations and structured investment vehicles, or SIVs.

The measures won't succeed in bringing down borrowing rates until next year, futures trading in Europe suggests.

Implied yields on Euribor futures contracts expiring this month through June 2009 rose today, with the December contract climbing 6 basis points to 4.92 percent. The implied yield on the March 2008 contract gained 6 basis points to 4.6 percent.

``The markets don't expect spreads to go down,'' said Alexander Titsch-Rivero, head of derivatives and structured products in Frankfurt at BHF-Bank AG, a German private bank.

``The actions by the central banks were just a placebo, a tranquilizer that doesn't solve the problem of the mistrust among banks on one hand and the potential for more losses in credit on the other.''

My view - These spreads of Libor over short term bonds for the US Dollar, British Pound and Euro indicate that sentiment within banks remains extremely distrustful. However we should also recognise that these are accelerating trends and are looking overextended, so we could see some reversion in the not too distant future.

The Fed and a number of other central banks are attempting to kick start the credit markets with concerted injections of liquidity and while they are making quite considerable policy shifts, they continue to mess up on the PR front. A phrase so often used by the media with reference to Afghanistan or Iraq also applies here; "the battle for hearts and minds." Or to use another metaphor, the Fed and BoE might think they know what is best for the patient, but they seriously need to work on their bedside manner.

Ben Bernanke remains an on-the-job trainee and he has allowed the Fed to fall behind the curve of events. We have heard, since Wednesday, that the Fed is looking at other tools to help alleviate the stress in the credit markets. However, one tool they don't seem to be considering is simply making more public appearances and talking with confidence about the banking sector. These actions would cost nothing and would send a signal that they are serious about dealing with the problem.

So far they've adopted a reactive stance, with only sparse commentary from Fed officials, which has resulted in traders interpreting their inaction as a vote of no confidence in the market. Personally, I believe that the bearish argument is overdone. However, the banking sector's troubles are not going to be fixed overnight and they will take much longer to rectify, if central bankers don't take a more active role in helping to restore confidence.