Libor for Dollars, Euros Fall on Government Bank-Rescue Plans

By Gavin Finch and Bob Chen

Bloomberg, Oct 14

Oct. 14 (Bloomberg) — Money-market rates in London fell after the U.S. joined the U.K., Germany and France in offering to buy stakes in banks to restore confidence in the global financial system.

The London interbank offered rate, or Libor, that banks charge each other for one week dollar loans slid 50 basis points to 4.08 percent today, the biggest drop since Sept. 19, according to the British Bankers’ Association. It was at 4.76 percent on Oct. 9, the highest level since December. The three-month euro rate fell 7 basis points to 5.23 percent, the largest decline since Dec. 28.

The U.S. will invest about $125 billion in nine of the biggest banks, including Citigroup Inc. and Goldman Sachs Group Inc., in exchange for preferred shares, said people briefed on the plan. The measure follows similar moves by European leaders to unlock credit markets by helping beleaguered banks.

“What everyone was crying out for was a coordinated central policy response, and that’s what we got,” said Patrick Bennett, a currency strategist with Societe Generale SA in Hong Kong. “What we had was a lack of confidence in the money markets. I think it’s starting to thaw.”

European and U.S. governments may spend as much as $3 trillion to unfreeze credit markets, meet demand for dollars and shore up banks. The European Central Bank today offered $100 billion for one day, after yesterday agreeing with counterparts in the U.S., Canada, Switzerland and the U.K. to provide unlimited dollar funds in auctions with maturities of seven days, 28 days and 84 days at a fixed interest rate.

Equities Rebound

Stocks rose for a second day, with the MSCI World Index adding 3.6 percent to its 9.5 percent surge yesterday. Equity markets worldwide suffered their worst rout last week on concern more financial institutions would collapse because of the freeze in credit markets.

The dollar Libor-OIS spread, a gauge of demand for cash, narrowed 14 basis points to 340 basis points. It was at 105 basis points on Sept. 15 and 24 basis points on Jan. 24. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed 12 basis points to 445 basis points, down from 464 basis points on Oct. 10, the most since Bloomberg began tracking the data in 1984.

The Bush administration will also buy preferred shares in Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., Merrill Lynch & Co., Morgan Stanley, State Street Corp. and Bank of New York Mellon Corp., said the people briefed on the plan. The proposal is part of a $700 billion rescue approved by Congress. Countries including France, Germany, Spain and Austria yesterday committed 1.1 trillion euros ($1.5 trillion) to guarantee bank loans and take stakes in banks equal to 3 percent of their economies.

Asia Rates

Money market rates fell across Asia after Japan and Australia pumped $9.1 billion into the financial system. Singapore’s three- month dollar loan rate dropped for the first time in a week, falling 13 basis points to 4.66 percent. Japan’s borrowing costs eased to the lowest this month.

In a sign that credit-markets remain strained, banks deposited a record amount of cash with the ECB overnight, lodging 182.8 billion euros at 3.25 percent, up from 154.7 billion euros on Oct. 10. They also borrowed 17.5 billion euros from the central bank at the emergency overnight marginal rate of 4.25 percent, up from 16.6 billion euros.

While the three-month dollar rate fell 12 basis points to 4.64 percent today, it is still 314 basis points more than the Fed’s target of 1.5 percent. The difference was a record 332 basis points on Oct. 10 and 82 basis points on Sept. 15, the day Lehman Brothers Holdings Inc. collapsed.

Libor, set by 16 banks in a survey conducted by the BBA each day in London, determines rates on $360 trillion of financial products worldwide, from home loans to derivatives. Member banks provide estimates on how much it would cost to borrow in 10 currencies for terms between one day and a year.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Bob Chen in Hong Kong at bchen45@bloomberg.net.

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