Dollar Libor Reaches 9-Month High; Europe Bailout Fails to Reassure Banks

The rate banks pay for three-month loans in dollars rose to the highest in almost nine months as Europe’s near-$1 trillion support plan in the wake of Greece’s budget crisis failed to encourage banks to step up lending.

The London interbank offered rate, or Libor, for such loans rose to 0.43 percent today from 0.423 percent yesterday, the most since Aug. 17, according to data from the British Bankers’ Association.

The European bailout has prevented Libor from jumping even further, said Christoph Rieger, co-head of fixed-income strategy at Commerzbank AG in Frankfurt, though it has failed to fully offset concern that Europe’s sovereign-debt crisis is hurting the quality of loan collateral. Libor rises when banks become more hesitant to lend to potentially risky counterparties.

“The EU’s package has kept rates from spiralling out of control,” Rieger said by phone. “The EU package has put a cap on the rate rise, but there’s no pressure on rates to go lower. There were some European banks who were finding it more difficult” to obtain dollar funding, he said.

The Libor-OIS spread, which compares three-month dollar Libor and the overnight indexed swap rate, and widens as banks’ willingness to lend falls, rose to 20.2 basis points today. That’s the highest level since Aug. 21. The spread ballooned to 364 basis points, or 3.64 percentage points, after the 2008 collapse of Lehman Brothers Holdings Inc.

The three-month rate for euros, or euro Libor, slipped to 0.624 percent today, from 0.628 percent yesterday. It rose to 0.634 percent on May 7, the highest level since Jan. 12.

EU-IMF Rescue

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.

WestLB AG contributed the highest rate today, at 0.495 percent. HSBC Holdings Plc gave the lowest, at 0.37 percent. The BBA strips out the four highest and lowest rates quoted, calculating the average of the middle eight.

The 16 euro nations agreed May 10 to offer as much as 750 billion euros ($951 billion), including International Monetary Fund backing, to contain the sovereign-debt rout. Among the measures announced, the U.S. Federal Reserve reopened dollar currency swaps with major central banks to alleviate funding pressure facing European banks.

Reopening Swap Lines

Reopening the swap lines won’t pose a problem because the Fed has experience operating the exchanges with other central banks, Fed Reserve Bank of Richmond President Jeffrey Lacker said yesterday in a speech in Greensboro, North Carolina.

“It’s consistent with actions we’ve taken in the past,” he said. The draw on the swap lines “may not be much at all,” he added.

The volume of swaps surged following the bankruptcy of Lehman Brothers Holdings Inc. and peaked at $583.1 billion in December of 2008. The volume of swaps declined throughout 2009 and the lines were closed in February.

The European Central Bank resumed weekly dollar auctions yesterday, holding an eight-day, fixed-rate, full-allotment auction that allotted $9.2 billion at 1.22 percent.

The auction attracted only seven bidders, according to Cagdas Aksu, a fixed-income strategist at Barclays Capital in London. This indicates banks aren’t under “huge funding pressure,” Aksu said yesterday.

Refinancing Operation

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.

The ECB allotted 35.7 billion euros in a 182-day refinancing operation today. Demand for liquidity has picked up recently as investors became more worried about the consequences of the debt crisis, according to Luca Cazzulani, deputy head of fixed income strategy at UniCredit SpA in Milan.

Some 56 banks participated in the auction, confirming that demand for liquidity is currently strong, and the average allotted size doubled from 300 million euros to 640 million euros, Cazzulani wrote in a report today.

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

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.