Libor Yesterday Morning

Libor Rises Most on Record After U.S. Congress Rejects Bailout
By Gavin Finch
Sept. 30 (Bloomberg) -- 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.
As money-market rates rise, banks charge higher interest on loans to companies and consumers. U.S. securities firms and lenders alone have a record $871 billion of bonds maturing through 2009, according to JPMorgan Chase & Co.
Yields on overnight U.S. commercial paper jumped 171 basis points today to an eight-month high of 3.95 percent, according to data compiled by Bloomberg. Average rates on paper backed by assets such as credit cards and auto loans rose 229 basis points to 6.5 percent, the highest since 2001.
Companies sell commercial paper to help pay for day-to-day expenses such as salaries and rent.
GMAC, owned by Cerberus Capital Management LP and General Motors Corp., is willing to pay 6 percent to borrow seven-day paper, up 25 basis points from yesterday and double that of 12 weeks ago, Bloomberg data show. The rate for New York-based Citigroup Inc. rose to 3.5 percent, up 75 basis points this month and the highest since January. General Electric Capital Corp. offered 30-day paper at 2.85 percent, the highest since February.
ECB Injection
Funding constraints are being exacerbated as financial companies try to settle trades and buttress balance sheets over the quarter-end, balking at lending for more than a day.
The Frankfurt-based ECB said it lent banks $30 billion for one day at a marginal rate of 11 percent, 900 basis points above the Fed's key rate of 2 percent. The ECB said it received bids for $77.3 billion. The Bank of Japan injected more than 19 trillion yen ($182 billion) into the country's system over the past two weeks, the most in at least six years. The Reserve Bank of Australia pumped in A$1.95 billion ($1.6 billion) today.
In the year before the turmoil in money markets began in July 2007, the Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, never exceeded 15 basis points. It widened to a record 250 basis points today, before easing back to 2.34 percentage points.
`Broken Down'
``The money markets have completely broken down, with no trading taking place at all,'' said Christoph Rieger, a fixed- income strategist at Dresdner Kleinwort in Frankfurt. ``There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending.''
Borrowing rates rose in Asia earlier today. The three-month interbank offered dollar rate in Singapore jumped to an eight- month high of 3.90 percent. The three-month rate in Hong Kong rose by the most in almost a week to 3.664 percent. The difference between the rate Australian banks charge each other for three-month loans and the overnight indexed swap rate reached 98 points, close to a six-month high.
Financial institutions have posted almost $590 billion of writedowns and losses tied to U.S. subprime mortgages since the start of last year, according to data compiled by Bloomberg.
`New Extreme'
Dexia got a 6.4 billion-euro ($9.2 billion) state-backed rescue, Belgian Prime Minister Yves Leterme said today. Yesterday, the U.K. Treasury seized Bradford & Bingley Plc, Britain's biggest lender to landlords, while governments in Belgium, the Netherlands and Luxembourg extended a lifeline to Fortis, Belgium's largest financial-services firm. Elsewhere, Hypo Real Estate Holding AG received a loan guarantee from Germany, and Iceland agreed to rescue Glitnir Bank hf.
``Counterparty fear in the banking sector is at a new extreme,'' said Greg Gibbs, director of currency strategy at ABN Amro Holding Bank NV in Sydney. ``Credit conditions are as tight as a drum. Unless this settles down, central banks would need to cut rates globally to bring funding costs down.''
Congress's rejection of the U.S. government's bank-rescue plan yesterday prompted traders to fully price in a cut in the Fed's target rate of at least a quarter point next month, futures on the Chicago Board of Trade showed. The odds were zero percent a month ago.
The difference between what banks and the U.S. Treasury pay to borrow money for three months, the so-called TED spread, was at 314 basis points today after breaching 350 basis points for the first time yesterday. The spread was 110 basis points a month ago.
``We can be sure that funding pressures are not going to ease while there is so much uncertainty,'' said Adam Carr, senior economist in Sydney at ICAP Australia Ltd., part of the world's largest inter-bank broker. ``Cash is going to be at a premium. There's really no end in sight.''
To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net Last Updated: September 30, 2008 15:25 EDT