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Dollar Libor May Rise to 0.5 Percent, Barclays Says

The rate banks say they pay each other for three-month dollar loans may rise to a one-year high if European policy makers fail to stymie investors’ concern the region’s debt crisis is worsening, according to Barclays Plc.

The three-month dollar London interbank offered rate, or Libor, will reach 0.5 percent by the end of the year, Barclays strategist Joseph Abate wrote in a note to clients Sept. 12. Libor was fixed today at 0.34911 percent, according to the London-based British Bankers’ Association. The rate has risen this year from as low as 0.245 percent on June 15.

European efforts to contain the region’s debt crisis have failed to quell speculation that Greece may default on its debt and that the crisis may spread. The yield on the Greek two-year note reached a record 77 percent yesterday. Investors question the ability of Greece to implement austerity moves fast enough to get a sixth payment from last year’s 110 billion-euro ($151 billion) bailout.

“Unless there is some sort of clarity out of Europe and some type of resolution to the sovereign-debt crisis there is really nothing to prevent Libor from going higher,” said New York-based Abate in a telephone interview yesterday. “There is stress in the financial system. We’ve already seen the volume of commercial paper issuance falling, with the amount of daily issuance down by about half, and the term of the paper being issued has shortened up. ”

Paper Levels

U.S. commercial paper outstanding declined $32 billion to $1.066 trillion in the week ended Sept. 7, according to Federal Reserve data. That was the lowest since the market, which has fallen for eight weeks, reached $1.063 trillion in the period ended March 9, according to Fed data compiled by Bloomberg.

The difference, or spread, between the dollar Libor and the overnight index swap rate, known as the Libor-OIS spread was 26.9 basis points today, up from as narrow as 11.8 basis points this year on June 16. The spread is an indirect measure of the availability of funds in the money market and of banks’ willingness to lend.

Credit Agricole SA and Societe Generale SA, France’s second- and third-largest banks, had their long-term credit ratings cut one level by Moody’s Investors Service, which now plans to examine the impact of tighter financing markets on French lenders. The country’s lenders top the list of Greek creditors with $56.7 billion in exposure to private and public debt, according to a June report by the Basel, Switzerland-based Bank for International Settlements.

Dollar Needs

“Banks operate globally and a lot of the European banks need dollars,” Abate said. “Because of the increase in counterparty risk, the unwillingness to lend to a European counterparty has picked up and that is being reflected in the higher cost of Libor, the cost of raising dollars.”

The top 10 U.S. prime money-market mutual funds cut their assets invested in securities including commercial paper issued by European banks in July to the lowest level since 2008 as the region’s debt crisis got worse, according to Fitch Ratings. U.S. prime money fund managers also reduced risk by shortening maturities with more than 20 percent of funds’ investment in French banks’ certificates of deposits with maturities of seven days or fewer at the end of July, a threefold increase in the shorter maturities compared with the end of June, according to Fitch.

Societe Generale said yesterday it planned to free up 4 billion euros in capital through asset sales by 2013 to reassure investors about its finances. The Paris-based bank holds about 900 million euros in Greek bonds, Societe Generale said yesterday in a statement.

Funding Rate

ICAP Plc’s three-month New York Funding Rate of unsecured bank costs was 0.4435 percentage point today, 9.4 basis points above Libor. The gap touched 9.7 basis points this week, the largest since February 2009. The rate was as low as 0.2428 this year on June 9.

ICAP unveiled the measure of U.S. bank rates in June 2008 after the accuracy of Libor was called into question. Banks in the anonymous ICAP survey are asked to quote a rate at which a representative A1/P1 credit rated institution would likely obtain dollar funding in the market, as opposed to where their own funding costs are, as in the British Bankers’ Association Libor survey.

“The rise in the three-month New York funding rate to over 43 basis points also seems to signal that there is a lot of momentum behind the Libor rise,” Abate said. “Of all the other interest rates out there, the rise in Libor seems to be lagging.”

To contact the reporter on this story: Liz McCormick in New York at emccormick7@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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