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March 12, 2009

Banking in 2009


March 10, 2009 (Bloomberg) — For the 11th day, the cost of borrowing in dollars for three months in London rose as banks sought cash to cover their commitments through the end of the first quarter.

The London inter bank offered rate, LIBOR, that banks say they charge each other for such loans climbed two basis points to 1.33 percent, the highest level since Jan. 8, the British Bankers’ Association said. The LIBOR-OIS spread, a gauge of bank reluctance to lend, increased to the most since Jan. 9.   “The liquidity will be horrible in the next couple of weeks,” said Vincent Chaigneau, head of international rates strategy at Societe Generale SA in London. “We have seen renewed stress in the LIBOR-OIS spread.”

Jeff Cox writes in a post on the NBC Dallas-Fort Worth News website:  LIBOR rates have swelled to prices not seen since December, with the trend indicating a June three-month rate of 1.7 percent, Lutz said in a research note. A widening in LIBOR emanates from lower confidence that institutions have in each other and leads to tighter lending policies. Three-month LIBOR gained Tuesday to about 1.33 percent.  The spread averaged 11 basis points from December 2001 to July 2007, and soared to 364 basis points in the weeks following the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc.”

“The inability of aggressive government action around the globe to eradicate credit issues is disturbing.  Among the signs that analysts say point to credit problems are in addition to the rate banks charge each other for overnight lending (LIBOR), the “Ted spread” which is the difference between 3-month LIBOR and the 3-month Treasury bill, the two-year credit default swap rates, and the Commercial Mortgage-Backed Securities index, or CMBX. The CMBX and the two-year swap spread both are at four-month highs, while the Ted Spread, falling Tuesday to 1.09 percent, also is moving lower.  The Ted Spread indicates willingness to lend,” Jeff Cox writes in a post on the NBC Dallas-Fort Worth News website.

Jeff Cox writes: “To be sure, the credit indicators are nowhere near the depths of September 2008 or so when lending all but dried up completely.  ‘After several months of swift declines and an environment where global central banks continue to cut short-term interest rates, any increase in Libor rates is a troubling reminder of the tension in credit markets,’ said Greg McBride.  ‘The equity markets have effectively been behind the curve of what the credit markets have seen and experienced first-hand.’”


“While analysts are quick to point out that the tightening is not at alarming levels at least in the short term, there’s concern over the pressure the failing economy will put on lending practices.  Following a year of aggressive money-easing, Fed fund futures now are indicating a 30 percent chance that the central bank will tighten monetary policy by June,” Jeff Cox writes


“‘The underlying economy continues to deteriorate. The default rates on some of these underlying loans have been able to go up,’ says Mike Larson, an analyst with Weiss Research. ‘While they’ve been able to buy a period of calm, we have yet to see if it’s a genuine turn and not just driven by Fed largesse.’”


Other indicators that have analysts concerned include the difference between investment grade bonds and Treasuries as well as increasing problems in the commercial real estate business.


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