Libor for Euros Declines to Lowest Level Since Lehman Collapse

By Gavin Finch

Oct. 21 (Bloomberg) -- The cost of borrowing in euros for three months fell to the lowest level since before Lehman Brothers Holdings Inc. collapsed as governments stepped up efforts to boost bank balance sheets and policy makers offered cash to revive lending.

The London interbank offered rate, or Libor, that banks charge each other for such loans dropped 3 basis points to 4.96 percent today, the British Bankers' Association said. That's the lowest level since Sept. 12, the Friday before Lehman failed. The overnight dollar rate slid 23 basis points to 1.28 percent, below the Federal Reserve's target for the first time since Oct. 3.

``The initiatives that governments have taken are beginning to work,'' said Laurence Mutkin, the London-based head of European fixed-income strategy at Morgan Stanley. ``We're seeing a lot of improvement.''

Governments worldwide have introduced measures to shore up bank balance sheets after money markets seized up following the Lehman bankruptcy on Sept. 15. The French government will inject 10.5 billion euros ($14 billion) into BNP Paribas SA, Societe Generale SA and four other domestic banks as they tap for the first time the 360 billion-euro rescue package unveiled this month.

Interbank rates have tumbled in the past week after policy makers in Europe offered lenders unlimited dollar funding. The European Central Bank and the Bank of England today made available as much U.S. currency as required. The ECB allotted $101.93 billion of 28-day cash at a fixed rate of 2.11 percent, while U.K. policy makers loaned $26 billion.

Libor-OIS

The Libor-OIS spread, which measures the difference between the three-month dollar rate and the overnight indexed swap rate, was at 274 basis points, down from 290 basis points yesterday and 364 basis points on Oct. 10.

Overnight indexed swaps are over-the-counter traded derivatives in which one party agrees to pay a fixed rate in exchange for the average of a floating central-bank rate during the life of the swap. For dollar swaps, the floating rate is the daily effective federal funds rate.

Treasury three-month bills fell for a fourth day, the longest sequence of declines in 10 weeks, as investor appetite for the safest assets dwindled on speculation concerted global action will ease the turmoil in the credit markets. The yield rose 14 basis points to 1.22 percent, the highest in about a month.

The three-month dollar Libor slid 23 basis points to 3.83 percent today. That's still 233 basis points more than the Fed's target rate for overnight loans of 1.5 percent, up from 120 basis points about a month ago. At the start of the year, the spread was 43 basis points. A basis point is 0.01 percentage point.

`Slight Improvement'

``We see a slight improvement on the interbank market, but no breakthrough yet,'' European Central Bank Executive Board member Juergen Stark said in an interview with German radio station Deutschlandfunk. ``There's a high risk that we'll see another incident'' in the banking sector.

The Libor is used to determine rates on $360 trillion of financial products worldwide, from mortgages to company loans and derivatives.

Barclays Plc, the U.K.'s second-biggest bank, confirmed a report by Cazenove that the lender's ability to issue unsecured funding has improved since Oct. 8, when the government announced a rescue package for financial institutions.

Rates for one-month asset-backed commercial paper fell to the lowest level in a month today. Yields on the highest-rated ABCP placed by dealers and due in 30 days dropped 30 basis points, the fourth-straight decline, to 3.45 percent, the lowest since Sept. 22, according to data compiled by Bloomberg.

TED Spread

Commercial paper is used by companies to meet short-term financing requirements.

The Fed invoked emergency authority today to purchase assets from money-market mutual funds that are having difficulty meeting redemptions from their investors. The central bank will lend to a series of special units that will buy certificates of deposit, bank notes and commercial paper with a remaining maturity of 90 days or less.

``There's plenty of cash on the table and there's plenty of money coming into the banking sector,'' said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking arm of Credit Agricole SA. ``What we're finding is that confidence has been improving.''

The difference between what banks and the U.S. Treasury pay to borrow for three months, the so-called TED spread, was 261 basis points today, down from 298 basis points yesterday.

The demise of Lehman deepened a global credit crisis that froze the commercial paper and money markets, led to Goldman Sachs Group Inc. and Morgan Stanley turning themselves into commercial banks and sent the TED spread on Oct. 10 to 464 basis points, the highest level since Bloomberg began compiling the data in 1984.

The overnight Libor for dollars doubled to 6.44 percent on Sept. 16, a day after the Lehman bankruptcy filing, as banks balked at lending to each other on speculation more would fail.

In Asia, the three-month interbank lending rate for Hong Kong dollars, or Hibor, dropped for a third day, sliding 31 basis points to 3.35 percent, its longest run of declines in more than a month. Singapore's three-month rate for U.S. dollar loans slid for a sixth day, to 3.92 percent.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Patricia Lui at plui4@bloomberg.net