With the forex markets as dull as Scottish rugby ahead of lunchtime’s interest rate announcements I want to re-visit one of the recent crunches.The liquidity crunch was the squeeze on new financing faced by UK banks, mainly in the 3-month area, due to the unwillingness of the Bank of England to play ball. Gordon Brown’s iron grip on Governor of the Bank of England, Mervyn King’s testicles persuaded the Bank to lend money, but at a penal rate of 6.75%.

“Hallelujah!” said the markets and the 3-month Libor rate came tumbling down from 6.9% to the current rate of 6.24%. And guess what? As soon as the money was available the silly old bankers said, “No thanks. We don’t need it.” Great, problem solved.

Well, not quite. You see, these sneaky little bankers have been catching the booze-cruise ferry across the Channel and borrowing money from the European Central Bank instead. European money is far cheaper to borrow, but more importantly, it can be done anonymously. No, sorry mate, you and I can’t pop over for a quiet couple of million. Nor could Northern Rock; coz the facility is only available to banks with a branch in the Eurozone.

Banks have been filling their trolleys with short-term and 3-month money at between 4.2-4.63%, free from the stigma, and potential hit to their share price, associated with borrowing from the Bank of England.

And here’s the other interesting bit, though I’ve not been back over my charts to check it out. Apparently, Sterling has been strengthening against the Euro on the day after these tenders as the banks switch their borrowings back into Sterling.

A quick word of warning as you dash off to find out the next tender date to trade off; a clever guy called Charles Goodhart had a ‘law’ named after him which in simple terms says that once you discover some social or economic pattern to trade off, the pattern breaks down. So now you’re wiser, but no richer.

Happy Trading