Libor for Dollars Climbs Above 0.50% to the Highest Recorded Since July 16

The rate banks say they pay for three-month loans in dollars rose above 0.5 percent for the first time in 10 months amid concern that the creditworthiness of financial institutions is deteriorating.

The London interbank offered rate, or Libor, for such loans advanced today to 0.51 percent, the highest level since July 16, from 0.497 percent at the end of last week, according to data from the British Bankers’ Association. The dollar Libor-OIS spread, a gauge of banks’ reluctance to lend, widened to the most since July 30.

Libor more than doubled this year as the European debt crisis fueled concern that the quality of banks’ assets used as collateral may be impaired. The three-month rate may climb to 0.54 percent by the end of the week as the trend “shows no sign of stopping just yet,” said Peter Chatwell, an interest-rate strategist at Credit Agricole Corporate and Investment Bank.

“We’ve gone through the psychological level of 0.5 percent,” said Chatwell in London. “Some of the spreads which measure banking stress, although not scary, suggest a trend higher.”

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. Contributing banks provide estimates on how much it would cost to borrow in 10 currencies for periods ranging from a day to a year.

Libor-OIS Spread

The dollar Libor-OIS spread increased to 27.9 basis points from 27 basis points. The spread, which compares three-month dollar Libor and the overnight indexed swap rate, surged to 364 basis points, or 3.64 percentage points, after the collapse of Lehman Brothers Holdings Inc. in September 2008.

Evidence is mounting that some financial institutions are facing stress. The Bank of Spain put CajaSur, a lender based in Cordoba, under a provisional administrator two days ago. The bank lost 596 million euros ($748 million) on 426 million euros in revenue last year.

“There’s some concern that things are moving away from the euro zone and may be moving into the banking side,” Chatwell said. “These are barometers of stress. Counterparty risks are rising, banks are showing some strain and that increases concern in the market, which exacerbates the problem.”

The three-month rate increased for the 12th consecutive week last week even as the European Union announced an almost $1 trillion backstop to aid its most indebted members. Among the measures announced, the U.S. Federal Reserve reopened dollar currency swaps with major central banks to alleviate funding pressures facing the euro-region lenders.

Euro Rate Falls

WestLB AG contributed the highest dollar Libor rate today, at 0.565 percent. The German state-owned lender, which was bailed out during the financial crisis, said last week its first-quarter profit slumped 82 percent after a decline in the value of European government bonds hurt trading results.

HSBC Holdings Plc gave the lowest rate, at 0.44 percent. The BBA strips out the four highest and lowest rates received, calculating the average of the middle eight.

The three-month rate for euros, or euro Libor, slipped to 0.634 percent today, from 0.636 percent on May 21. The three- month euro interbank offered rate, or Euribor, advanced to 0.697 percent, from 0.695 percent, according to the European Banking Federation. That’s the highest since Jan. 5.

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

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