View Full Version : LIBOR - ‘Lack of Trust’

16th May 2010, 09:37 PM
‘Lack of Trust’ Pummels Bank Lending in Europe: Credit Markets

By Pierre Paulden and Shannon D. Harrington

May 17 (Bloomberg) -- Money markets are showing rising levels of mistrust between Europe’s banks on concern an almost $1 trillion bailout package won’t prevent a sovereign debt default that might trigger a breakup of the euro.

Royal Bank of Scotland Group Plc and Barclays Plc led financial firms punished by rising borrowing costs, British Bankers’ Association data show. The cost to hedge against losses on European bank bonds is 63 percent higher than a month earlier. Investment-grade corporate debt sales in the region plummeted 88 percent last week to $1.2 billion from the prior period, according to data compiled by Bloomberg.

The rate banks say they charge each other for three-month loans in dollars is the highest in nine months, even after a government-led rescue designed to prevent Greece from defaulting on its debt and a new financial crisis. The euro is trading at its weakest level versus the dollar since the aftermath of Lehman Brothers Holdings Inc.’s collapse, and stocks tumbled.

Bank lending “conveys a lack of trust in the system,” said Robert Baur, chief global economist at Des Moines, Iowa- based Principal Global Investors, which manages $222 billion. “Banks are a little reluctant to lend overnight as they don’t know the full extent of what is on the bank balance sheets.”

The three-month London interbank offered rate in dollars, or Libor, rose to 0.445 percent last week, the highest level since August, from 0.428 percent on May 7 and 0.252 at the end of February, according to the British Bankers’ Association.

‘Access Spotty’

Concerns have spilled into the market for commercial paper, debt used by companies and banks for their short-term operating needs. Rates on 90-day paper are more than double the upper band of the federal funds rate, about twice the average in the five years before credit markets seized up in mid-2007.

“The list of banks able to tap the three-month market remains extremely limited with access spotty and expensive,” Joseph Abate, a money-market strategist at Barclays in New York, wrote in a May 14 note to clients.

Elsewhere in credit markets, the extra yield investors demand to own corporate bonds instead of government securities climbed 3 basis points on May 14 to 171 basis points, or 1.71 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The index fell from 177 basis points a week earlier, the first decline since the period ended April 16.

Investors seeking to protect themselves from losses on bonds or speculate on creditworthiness by buying credit-default swaps drove benchmark indexes in Europe and the U.S. higher at the end of the week, according to prices from Markit Group Ltd.

Default Swaps

The Markit iTraxx Europe Index, linked to the bonds of 125 companies, rose 11.5 basis points to 109.75 basis points on May 14, down from 133 a week earlier, Markit prices show. The Markit CDX North America Investment Grade Index, tied to 125 companies in the U.S. and Canada, rose 6.8 to 107.9. The index was at 118.7 on May 7.

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. The contracts typically rise as investor confidence deteriorates and fall as it improves.

Yields on Fannie Mae and Freddie Mac mortgage securities that guide home-loan rates dropped to the lowest in five months on concern the sovereign debt crisis will stunt economic growth.

Yields of Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds tumbled 0.07 percentage point to 4.2 percent, the lowest since Dec. 17, according to data compiled by Bloomberg.

Global corporate bond sales rose to $20.2 billion last week from $11.9 billion in the previous five-day period, which was the lowest this year, Bloomberg data show. Issuance compares with a weekly average for 2010 of $53 billion.

Leveraged Loans

Prices on the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, rose 0.09 cent on the dollar last week to 90.98 cents.

About $111.4 billion in U.S. speculative-grade loans have been arranged this year, according to Bloomberg data, up from $34.4 billion in the comparable period in 2009. More than $373.1 billion of the loans were arranged during the period in 2007.

Cincinnati Bell Inc., a telephone company serving Ohio, is seeking a $760 million term loan to finance its acquisition of CyrusOne and to refinance existing bank debt. The loan is part of a $970 million senior secured credit facility, which also includes a $210 million revolving credit line, the Cincinnati- based company said in a May 13 filing.

EMI Lifeline

In Europe’s loan market, EMI Group Plc was given a lifeline after investors agreed to inject enough cash to maintain the banking agreements of the 79-year-old record company of The Beatles. Guy Hands’s Terra Firma Capital Partners Ltd. will put more cash into the label, EMI said in a May 14 statement. The investment will be made by June 14. Citigroup Inc. is the principal lender. No further details were disclosed.

The extra yield investors demand to own emerging-market bonds instead of Treasuries rose 15 basis points on May 14 to 295 basis points, according to JPMorgan Chase & Co.’s Emerging Market Bond index. Spreads rose as high as 328 a week earlier.

Brazil central bank President Henrique Meirelles said May 14 that market volatility stems from “natural” doubts over the measures taken by Europe. Meirelles, speaking to reporters in Rio de Janeiro, said Brazil is well prepared to face any international crisis because of its high currency reserves, floating exchange rate and inflation near target.

European Bailout

European policy makers’ plan to prevent a sovereign-debt collapse that threatened to slow the global economic recovery and tear apart the 11-year-old common currency was released on May 10. The loan package offers as much as 750 billion euros ($927 billion), including International Monetary Fund backing, to countries facing instability, while the European Central Bank said it will buy government and private debt.

On May 14, the euro slid below $1.24 to the lowest level since October 2008 and stocks trimmed a weekly rally. The Standard & Poor’s 500 Index declined 1.9 percent, paring gain for the week to 2.3 percent. The Stoxx Europe 600 Index slumped 3.4 percent to finish a 4.8 percent weekly advance.

Deutsche Bank AG Chief Executive Officer Josef Ackermann said Greece may not be able to repay its debt in full, and former Federal Reserve Chairman Paul Volcker said he’s concerned the euro area may break up. Sony Corp., the world’s second- largest maker of consumer electronics, said it may suffer a “significant impact” if Europe’s deficit spreads, while Chinese Premier Wen Jiabao said the foundations for a worldwide recovery aren’t “solid” as the sovereign-debt crisis deepens.

Commercial Paper

Rates on commercial paper for 90 days are 24 basis points above the upper band of the Fed’s zero to 25-basis point target rate for overnight loans among banks. While far below the 245- basis point gap reached in October 2008, the spread is more than double the 10-basis-point average in the five years before credit markets seized up in the middle of 2007. As recently as February, financial CP rates were below the federal funds rate.

Except for banks with little exposure to European sovereign risk, banks “have found liquidity to be scarce, securing funding only one month and shorter and mostly concentrated inside one week,” Abate from Barclays wrote in the report.

The rate at which London-based Barclays, the U.K.’s third- largest bank by market value, told the British Bankers’ Association it could borrow for three months in dollars climbed 2 basis points last week to 47 basis points, the highest since July 2009, and is up from 34 basis points on April 30, Bloomberg data show. The bank’s rate is 2.5 basis points above the three- month Libor. On average, Barclays reported a rate that was 1.3 basis points below Libor during the past year.

Barclays spokesman Mark Lane declined to comment.

Credit Suisse Rate

Credit Suisse Group’s rate has jumped 11 basis points to 47 this month and was 2.5 basis points higher than the benchmark on May 14, compared with an average 1.5 basis points higher during the past year. The firm’s primary sources of funding are long- term debt, shareholders’ equity and deposits, said Marc Dosch, a spokesman for Switzerland’s biggest bank by market value.

Releasing its first-quarter results last month, the Zurich- based bank said its “exposure to Greece is not material” and its “exposure to the other southern European economies that have been subject to credit downgrades is relatively limited.”

The reported rate for Edinburgh-based Royal Bank of Scotland, the U.K.’s biggest state-controlled bank, climbed 10 basis points to 46 this month, 1.5 basis points higher than the benchmark.

RBS finance director Bruce Van Saun said last week the bank held 1.5 billion pounds ($2.2 billion) in Greek debt with about 400 million pounds of unrealized losses. Credit exposure to Greece was less than 1 billion pounds, he said. “Overall, our exposure to Greece is moderate, and any potential economic impact, I would say, is manageable,” Van Saun said on a May 7 conference call.

RBS spokesman Michael Strachan declined to comment further.


This also happened right before the 2008 Wall Street Crash when Paulson & Bernanke threatened Congress with Armagedon before the TARP bailout..


19th May 2010, 06:39 AM
Libor for Three-Month Dollars Rises to Highest Since July

May 19 (Bloomberg) -- The rate banks pay for three-month loans in dollars rose to the most in more than nine months as Germany prohibited some short-selling, boosting demand for the perceived safety of dollar-denominated assets.

The London interbank offered rate, or Libor, for such loans rose for a sixth straight day, reaching 0.477 percent today, from 0.465 percent, according to data from the British Bankers’ Association. That’s the highest since July 31.

German financial regulator BaFin said yesterday it would prohibit certain bets against European government securities in an effort to calm the region’s markets in the wake of the Greek debt crisis. The euro dropped as low as $1.2144, the weakest since April 2006 as investors sought haven in the U.S. currency. Libor had been climbing through May as the Greek debt crisis made banks more concerned about the quality of collateral held by their counterparties.

“Germany’s decision added to banks’ funding pressures,” said Peter Chatwell, a strategist at Credit Agricole Corporate and Investment Bank in London. “It leads to some speculation in the market that there may be a problem in the German banking system.”

The three-month rate for euros, or euro Libor, increased to 0.635 percent today, from 0.63 percent, the highest level since Jan. 12. The three-month euro interbank offered rate, or Euribor, increased to 0.69 percent today from 0.688 percent, according to the European Banking Federation. That’s the highest level since Jan. 8.

Wider Spread

The dollar Libor-OIS spread, a gauge of banks’ reluctance to lend, rose to 25 basis points from 24 basis points, the highest since Aug. 13. The spread, which compares three-month dollar Libor and the overnight indexed swap rate, ballooned to 364 basis points, or 3.64 percentage points, after the 2008 collapse of Lehman Brothers Holdings Inc.

The three-month rate rose for the 11th straight week last week even after the European Union announced an almost $1 trillion backstop to assist 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’s lenders.

The European Central Bank allotted $1 billion in an 84-day refinancing operation yesterday, at a rate of 1.24 percent. Last week, it allotted $9.2 billion in 8-day funds at 1.22 percent.

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.

WestLB AG contributed the highest rate today, at 0.535 percent. HSBC Holdings Plc gave the lowest, at 0.41 percent. The BBA strips out the four highest and lowest rates received, calculating the average of the middle eight.