A Day without Economic Red Flags: That’s Not Today as Libor Rises

One of the darkest indicators of our frozen financial markets in the recent past was the “Libor Rate” or the rate banks must pay to borrow from each other on a short term basis.  As the banks began to horde cash and the credit markets froze tighter than Barney Franks food stained shirt the Libor Rate rose and stayed high.  The financial shows would obsess over the rate and when the Libor finally began to come down everyone breathed a sigh of relief and credit to some extent began to flow once again. 

In the intervening time we’ve elected a new President who seems to be determined to use the fear generated by the economic crisis to push through socialized Medicine, a massive pro union anti business agenda, social spending that’s unprecedented in the history of planet earth to say nothing of flooding the world with newly printed dollars, and now a funny thing’s happening to the Libor Rate.  It’s going up again.  The further up it goes the more the credit slows and the possibility that it may freeze solid once again is definitely a possibility as the markets lose faith in Obama’s ability and or willingness to solve the banking crisis

“Maybe there’s no solution or maybe the solution is politically impossible”, that’s the word from some of the folks Bloomberg quotes in the outstanding article that I’ve excerpted below. Be sure to read the whole article at Bloomberg.com.  Here’s the URL for the story:



March 11 (Bloomberg) — The cost of borrowing in dollars is rising as the global recession deepens and central bank efforts to prop up the financial system fail to prevent a growing number of banks from requiring government bailouts.

The London interbank offered rate, or Libor, that banks say they charge each other for three-month loans stayed at 1.33 percent today, near the highest level in since Jan. 8 and up from this year’s low of 1.08 percent on Jan. 14, the British Bankers’ Association said. The Libor-OIS spread, a gauge of bank reluctance to lend, widened to the most since Jan. 9.

Short-term borrowing costs are increasing as banks hoard cash and governments struggle to thaw credit markets after finance companies reported almost $1.2 trillion of writedowns and losses since the start of 2007. Banco Popolare SC yesterday became Italy’s first lender to seek state aid. Lloyds Banking Group Plc, the U.K.’s largest mortgage provider, ceded control to the government March 7. U.S. regulators seized 17 failing banks so far this year.

“The market is beginning to think that the solution is either not politically possible, or we can’t afford it, or maybe there isn’t a solution,” said Bob Baur, chief global economist at Des Moines, Iowa-based Principal Global Investors, which manages $198 billion of assets. Libor’s rise “is just another indication of that concern,” he said.

Rising Libor shows banks remain skittish 19 months later because they still don’t know if they can trust each other, said Soren Elbech, treasurer of the Inter-American Development Bank, a Washington-based lender to Latin American and Caribbean countries. Libor is used to calculate rates on $360 trillion of financial products worldwide, according to the Bank for International Settlements in Basel, Switzerland.

While the gap is forecast to shrink, Alan Greenspan, chairman of the Federal Reserve from August 1987 to January 2006, said in June he won’t consider markets back to “normal” until Libor-OIS falls to 25 basis points.

Dollar Libor for three months rose for 11 days through yesterday as banks sought cash to cover commitments through the end of the first quarter.

“The liquidity will be horrible in the next couple of weeks,” Vincent Chaigneau, head of international rates strategy at Societe Generale SA in London, said yesterday.

Wider borrowing spreads show growing concern about corporate defaults as the recession worsens. The global economy will contract this year in what can be called the “great recession,” Dominique Strauss-Kahn, managing director of the International Monetary Fund, said in a speech to African central bank governors and finance ministers in Dar es Salaam, Tanzania, yesterday.

“The IMF expects global growth to slow below zero this year, the worst performance in most of our lifetimes,” Strauss- Kahn said. “Continuing deleveraging by world financial institutions, combined with the collapse in consumer and business confidence, is depressing domestic demand across the world.”


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