Dollar Libor Holds Near Nine-Month High After EU's $1 Trillion Loan Accord

The rate banks say they pay for three-month loans in dollars stayed near the highest level in about nine months on concern an almost $1 trillion European loan plan may not be enough to restore confidence in markets.

The London interbank offered rate, or Libor, for such loans slipped to 0.421 percent today, from 0.428 percent on May 7, the highest since Aug. 17, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks’ reluctance to lend, widened more than 1 basis point to 19.2 basis points.

Euro-region nations agreed overnight to offer as much as 750 billion euros ($962 billion), including International Monetary Fund backing, to contain the fallout from the Greek fiscal crisis. The three-month dollar Libor jumped last week to the highest level since August on concern banks are holding too many assets of Europe’s most indebted nations.

“The package has only partly given the all-clear to money markets,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “There’s still a little bit of wariness over counterparty risk. In many ways, the problems that already exist in terms of exposure haven’t been expunged. The financial sector is still in a pretty dicey situation.”

The European Central Bank said it will buy government and private debt as part of the measures. The U.S. Federal Reserve also reopened dollar currency swaps with major central banks to combat funding pressure facing European banks. The decline in the Libor was the first in 14 days, the BBA data showed. The jump on May 7 was the biggest in almost 16 months.

Benchmark Rate

Three-month dollar Libor climbed by more than eight basis points last week, the most since October 2008, as concern over the quality of collateral needed to secure loans heightened banks’ reluctance to lend to potentially risky counterparties. These doubts pushed the Libor-OIS spread to the widest since August.

Three-month Libor is a benchmark for about $360 trillion of financial products worldwide, ranging from mortgages to student loans. Dollar Libor is set by 16 banks in a daily survey by the BBA before 11 a.m. in London. Member banks provide estimates on how much it would cost to borrow in 10 currencies for periods ranging from a day to a year.

WestLB AG contributed the highest rate today, at 0.49 percent. Rabobank International gave the lowest, at 0.365 percent. The BBA strips out the four highest and lowest rates quoted, calculating the average of the middle eight.

The three-month rate for euros, or euro Libor, dropped to 0.628 percent today. It rose to 0.634 percent on May 7, the highest level since Jan. 12.

Swap Lines

EU policy makers were jolted into action with their new loan plan after investors judged the 110 billion-euro bailout of Greece as insufficient to keep the debt crisis from spreading to other nations. Overnight deposits with the ECB, which climbed to a 10-month high of 290 billion euros at 0.25 percent on May 6, slipped to 282 billion euros at the end of last week.

“The increase of deposits indicates that demand for liquidity is picking up,” said Chiara Cremonesi, a fixed-income strategist at UniCredit SpA in London. Further evidence is reflected in the widening of the Libor-OIS spread, she said, adding that the Euribor-OIS spread also remained “under pressure.”

The Fed reinstated foreign-exchange swap lines between major central banks “to ensure sufficient supply of dollar liquidity,” UniCredit analysts wrote today.

The Libor-OIS spread, a gauge of the reluctance of banks to lend that compares three-month dollar Libor and the overnight indexed swap rate, widened to the most since Aug. 25. The spread ballooned to 364 basis points, or 3.64 percentage points, after the collapse of Lehman Brothers Holdings Inc. in 2008.

The three-month euro interbank offered rate, or Euribor, was unchanged at 0.682 percent today, according to the European Banking Federation. That matched the highest level since January, reached last week.

To contact the reporter on this story: Keith Jenkins in London at kjenkins3@bloomberg.net

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