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Libor for Dollars Slips as Collateral Concern Eases

The rate banks say they pay for three-month loans in dollars fell, snapping 13 days of gains, as financial institutions became less wary of lending cash.

The London interbank offered rate, or Libor, for such loans slipped to 0.536 percent today, from 0.538 percent yesterday, according to data from the British Bankers’ Association. The last time it declined was on May 10. The dollar Libor-OIS spread, a gauge of banks’ reluctance to lend, also dropped.

“Tensions have definitely eased and that usually indicates that Libor will come down,” said David Keeble, head of fixed-income strategy at Credit Agricole Corporate and Investment Bank in London. “The Libor-OIS spread has also narrowed, which allays some of the fears over the availability of dollars to European institutions.”

Central banks are offering more cash to reduce stress in money markets that caused Libor to more than double this year as the European sovereign debt crisis deepened. The European Union announced an almost $1 trillion backstop to aid its most indebted members on May 10. The same day, the Federal Reserve reopened dollar currency swaps with major central banks to alleviate funding pressures among euro-region lenders.

“There is not a universal shortage of dollars because the Fed’s balance sheet now amounts to $2.4 trillion instead of around $930 billion in mid-2008,” Keeble said. “The blockage is due mainly to European institutions finding it hard to get dollars.”

Libor-OIS Spread

The dollar Libor-OIS spread narrowed to 30.6 basis points today, from 30.7 basis points. That compares with an average of about 9 basis points in the first three months of the year. 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.

“This is not the stuff that financial crises are made of,” Mark Schofield, head of interest-rate strategy at Citigroup in London, wrote in a research note yesterday. “A return to the more prudent lending patterns of the 1980s and 90s, however, should be welcomed rather than feared from the perspective of the long-term health of the financial system.”

Highest, Lowest Rates

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

Royal Bank of Scotland Group Plc contributed the highest dollar Libor rate today, at 0.60 percent. Rabobank NA and Deutsche Bank AG gave the lowest, at 0.49 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 0.635 percent yesterday. The three-month euro interbank offered rate, or Euribor, was unchanged today at 0.699 percent, according to the European Banking Federation. That matches the highest level since Jan. 5.

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