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Falling Libor signals credit market thaw

Bloomberg May 2, 2009, 02.16am IST

LONDON: The London interbank offered rate that financial companies charge each other for three-month dollar loans fell to within a basis point of 1% as central banks and governments unlock credit markets.

Libor declined one basis point to 1.01% on Friday, according to the British Bankers' Association. The Libor-OIS spread, a gauge of banks' reluctance to lend, narrowed to 81 basis points, the lowest level since September 4. Libor hasn't been at 1% since June 2003. Citigroup Inc submitted the lowest rate, at 0.96%, while UBS AG and Bank of Tokyo-Mitsubishi UFJ quoted the highest, at 1.05%.

"Liquidity and confidence is returning to the wholesale markets," John Ewan, a London-based director of the BBA, said by e-mail. "The very low base rates and target rates being set by central banks worldwide lead to Libor fixings that are, in absolute terms, the lowest we have ever seen." The three-month rate, which rose as high as 4.82% in October, tumbled as the Federal Reserve and the US government provided $12.8 trillion to bail out the banking system. Libor, set by the BBA in London, determines borrowing costs on about $360 trillion of financial products around the world, ranging from home mortgages to corporate bonds.