Libor Rises 431 basis points, Most on Record After Congress Rejects Bank Bailout

September 30, 2008 by · Leave a Comment
Filed under: Industry News 

Well this shows how acute this situation is now it is time to let the market cleanse itself to get these excesses out of the way. The LIBOR or Interbank lending rate have gone up 431 basis points to bring the rate for banks to lend to each other to 6.88% which is so high that no one would want a loan at that rate.

News Piece:

The cost of borrowing in dollars overnight in London rose the most on record after the U.S. Congress rejected a $700 billion bank-rescue plan, putting an unprecedented squeeze on the global financial system.

The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 percent today, the British Bankers’ Association said. The euro interbank offered rate, or Euribor, for one-month loans jumped to a record 5.05 percent, the European Banking Federation said. The Libor-OIS spread, a gauge of the scarcity of cash, also increased to an all-time high.

“This is unheard of, the money markets should be the engine driving the financial system but they have broken down,” said Kornelius Purps, a fixed-income strategist in Munich for UniCredit Markets and Investment Banking, a unit of Italy’s largest lender. “Any institution that hasn’t completed its 2008 funding needs by now is going to be in very serious trouble. More banks are going to need to be bailed out.”

The seizure in the credit markets is tipping lenders toward insolvency, forcing governments to rescue five banks in the past two days, including Dexia SA, the world’s biggest provider of loans to local governments, and Wachovia Corp.

Money-market rates climbed even after the Federal Reserve more than doubled the size of its dollar-swap line yesterday with foreign central banks to $620 billion. In Europe, banks borrowed dollars from the ECB today at almost six times the Fed’s benchmark interest rate.

Commercial Paper

Libor, set by 16 banks including Citigroup Inc. and UBS AG in a daily survey by the BBA, is used to calculate rates on $360 trillion of financial products worldwide, from credit derivatives to home loans and company bonds.

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