Libor for Three-Month Dollar Loans Climbs to Highest Level Since July 2009

The rate at which London-based banks say they can borrow for three months in dollars rose to the highest level in almost 2 1/2 years as the euro region’s sovereign debt crisis intensifies.

The London interbank offered rate, or Libor, for three- month dollar loans climbed to 0.54000 percent, from 0.53775 percent yesterday, data from the British Bankers’ Association showed. That’s the highest level since July 6, 2009, exceeding the previous high of 0.53925 percent reached June 17, 2010. The dollar Libor-OIS spread, a measure of bank reluctance to lend, widened.

French banks have led the increase in Libor amid concern they may need additional capital as the debt crisis weighs on the values of their government bond holdings, according to data compiled by Bloomberg. Credit Agricole Corporate & Investment Bank submitted the highest rate today among the contributing panel of 18 lenders, at 0.5950 percent, the same as yesterday. HSBC Holdings Plc posted the lowest, unchanged at 0.340 percent.

“The upward pressure on dollar Libor comes predominately from the scramble for funding by European banks,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “There are concerns about the euro-zone debt crisis and the uncertainty over European bank portfolio holdings of sovereign debt.”

The European Central Bank said demand for three-month dollar loans surged after it almost halved the cost of the funds in a concerted action with five other central banks including the U.S. Federal Reserve.

ECB Dollar Lending

The Frankfurt-based ECB said it will lend $50.7 billion to 34 euro-area banks tomorrow for 84 days at a fixed rate of 0.59 percent. That compares with the $395 million lent in the last three-month offering on Nov. 9 at a rate of 1.09 percent. The ECB doesn’t disclose the identity of the banks it lends to.

“Today’s take-up at the ECB tender exceeded some expectations,” Lloyds’ Wand said. “It’s cheaper now to go through the central bank route” for dollar funding. “The trade-off between cost and stigma attached is less as well. Libor may stay elevated in the near-term because there’s still an underlying funding demand for dollars.”

Libor, calculated by Thomson Reuters Corp., represents the average of the collected figures from the panel, removing the highest and lowest four quotes and dividing by the remaining 10. The resulting benchmark determines interest rates on an estimated $360 trillion of financial instruments around the world, according to the Bank for International Settlements.

Eurodollar Futures

Implied rates on eurodollar futures expiring in December are predicting three-month dollar Libor will rise to 0.5525 percent by Dec. 19, Bloomberg data show.

Standard & Poor’s said this week that a sample of 53 large euro-area banks from 12 countries shows that they face a record 205 billion euros ($275 billion) in bond maturities in the first quarter, more than twice the amount that came due in each of the third and fourth quarters.

Bank of Nova Scotia (BNS) left the contributing panel on Dec. 2, Brian Mairs, a spokesman for the BBA, said.

“Membership of the contributor panels is entirely voluntary,” he said today in an interview. He declined to comment on why the bank left.

The Libor-OIS spread widened to 44.7 basis points at 3:33 p.m. London time, from 44.5 basis points yesterday.

The TED spread, or the difference between what lenders and the U.S. government pay to borrow for three months, narrowed to 53.49 basis points from 53.77 basis points yesterday.

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, declined to 110 basis points under Euribor after the European Central Bank said demand for three-month dollar loans jumped. The cost was 119 basis points under Euribor yesterday.

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

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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