Libor for Three-Month Dollars Rises as Credit Remains Frozen

By Gavin Finch and Nate Hosoda

Oct. 10 (Bloomberg) -- The cost of borrowing in dollars in London for three months rose as cash injections and interest-rate cuts by 10 major central banks failed to thaw a credit freeze that put stocks on course for their worst week in 30 years.

The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 7 basis points to 4.82 percent today, the British Bankers' Association said. The rate in Tokyo jumped to the highest since 1998 even as the Bank of Japan added more than $30 billion to the banking system. The overnight dollar rate tumbled 262 basis points to 2.47 percent.

``Central banks are trying to supply liquidity, and in many cases it just comes back to them,'' said Robin Marshall, director of international fixed income in London at NCL Smith & Williamson, which oversees about $20 billion in assets. ``There's a real problem in getting people to put their money to work. The fear of counterparty risk is so intense that the only bank prepared to lend at the moment is the central bank.''

Stock exchanges in countries including Russia and Austria delayed the opening of trading today and Indonesia extended a two-day halt as valuations plunged on concern more financial institutions will fail. Iceland yesterday suspended trading until Oct. 13 after the government seized Kaupthing Bank hf, the nation's biggest lender. Banks in South Korea stopped giving credit to importers.

Seized Up

Lending between financial institutions has seized up since the collapse of Lehman Brothers Holdings Inc. on Sept. 15, stymieing attempts by governments and central banks to stave off a global recession. The Bank of Japan added 3 trillion yen ($30.3 billion) to the banking system and the Reserve Bank of Australia pumped in A$2.63 billion ($1.8 billion). The European Central Bank today loaned banks $94 billion for four days.

The MSCI World Index lost 5.3 percent today, extending this week's drop to 20 percent, the most since at least 1970. Gold was headed for the biggest weekly gain as investors sought a haven for their cash. The Libor-OIS spread, a gauge of cash scarcity, climbed to a record 366 basis points.

``You just don't know whether the person you're lending to is going to be the guy that has the weak balance sheet and is going to fall over,'' said Sally Auld, an interest-rate strategist at JPMorgan Securities Australia Ltd. in Sydney. ``What markets are telling you is that it doesn't matter what central banks and governments do.''

Libor Settings

Libor, set by 16 banks in a survey conducted by the BBA each day in London, determines rates on $360 trillion of financial products worldwide, from home loans to derivatives. Member banks provide estimates on how much it would cost to borrow in 10 currencies for terms between one day and a year.

While the estimates that go into Libor used to be based on actual transactions between banks, they have become little more than guesswork since credit markets froze, according to three people with knowledge of how interbank rates are set.

Hong Kong's three-month interbank offered rate, or Hibor, climbed 1 basis point to 4.41 percent today, the highest level since Oct. 31. Singapore's three-month dollar loan rate increased for a fourth day, rising 23 basis points to 4.74 percent, the highest this year.

The ECB yesterday offered banks as much cash as they required for six days at its benchmark interest rate of 3.75 percent, bringing forward new measures to soothe money markets. It also loaned banks a record $100 billion in overnight-dollar funds, allotting most of the cash at 5 percent, 350 basis points above the Federal Reserve's benchmark rate. Today, it allotted four-day cash at 0.5 percent.

Rate Cuts

The BOJ has pumped more than 25 trillion yen into the system in the past three weeks, the most in at least six years, after lending growth at Japanese banks slowed in September for the first time in nine months as companies cut earnings forecasts. Loans, excluding those by credit associations, rose 1.8 percent in September from a year earlier, after increasing 2 percent in August, the Bank of Japan said today.

South Korea, Taiwan and Hong Kong cut interest rates yesterday, a day after reductions by central banks including the Fed and ECB. The U.K. government pledged Oct. 8 to spend 50 billion pounds ($87 billion) to bolster British banks.

Japan's overnight call rate climbed as much as 18 basis points, or 0.18 percentage point, to 0.72 percent today, before falling back to 0.5 percent following a second injection of cash, according to brokerage Tokyo Tanshi Co.

The Reserve Bank of Australia added cash through so-called repurchase agreements after estimating money markets would have a deficit of A$1.84 billion in funds today. Australian banks reduced deposits held at the central bank by A$1.37 billion to A$8.36 billion yesterday, after those holdings reached a record A$11.04 billion on Sept. 30, the RBA said today on its Web site.

TED Spread

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, was at 457 basis points, the most since Bloomberg began tracking the data in 1984.

``While the authorities across the globe have taken a host of unprecedented measures to shore up confidence, nothing seems to be working,'' Rajiv Setia and Piyush Goyal, strategists at Barclays Capital Inc. in New York, wrote in a report. ``Participants are increasingly unwilling to bear counterparty risk with any entity, other than the government, at any price.''

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Nate Hosoda in Tokyo at nhosoda@bloomberg.net