Libor's Rise will Sock Borrowers

Libor is one of the world's most important financial indicators. It serves as a benchmark for $900 billion in subprime mortgage loans that adjust -- typically every six months -- according to its movements. Companies globally have nearly $9 trillion in debt with interest payments pegged to Libor, according to data provider Dealogic. A sharp and unexpected rise in a widely used interest rate is threatening to add billions of dollars to the interest bills of homeowners, companies and other borrowers around the world. If sustained, the past week's rise of Libor could add roughly $18 billion in annual interest costs on that corporate debt, or about $100 to the monthly payment on a $500,000 adjustable-rate mortgage loan The Libor rate, which is supposed to reflect the average borrowing costs of banks, had been falling in recent months as the Fed lowered interest rates. At the same time, though, the gap between the interest rates central banks set and Libor has risen -- an indicator of increased concerns about banks' financial health. That, combined with this weeks' moves, counteracts efforts by the Fed to ease pressures on the economy. While Fed officials see the rise in Libor spreads as predominantly reflecting pressures on European banks, they also see it as symptomatic of a broad reluctance by banks in the U.S. and elsewhere to lend money they think they may need a few weeks from now. They continue to study options for addressing the pressures. One way might be to expand the Fed's "term auction facility," from the $100 billion it has currently lent to banks. It could also extend the term of loans made through the facility from the current 28 days, perhaps to three months or as long as six months. Friday, the closely watched three-month U.S. dollar Libor rose 0.09 percentage point to 2.9075%, its highest in nearly six weeks. Between Wednesday and Friday, the rate rose 0.174 percentage point, an increase that hadn't been seen since August and the start of the financial turndown that has spread from banks into the broader economy. Meanwhile, the six-month U.S. dollar rate -- used as the basis for payments on most subprime mortgages -- rose even more sharply and was quoted Friday at 3.01875%, or 0.33 percentage point more than at the start of the week. In commercial real estate, the rise in Libor is bound to have a chilling effect, because many developers borrow heavily using floating-rate debt linked to Libor. Until recently, declining rates had benefited borrowers, but some lenders were growing wary. Banks have started to include a floor in Libor-linked loans, said Peter Fitzgerald, chief financial officer at Radco Cos., an Atlanta developer. That means borrowers' savings would be limited if Libor continued to sink, but borrowers can be hit by the latest rise. "If Libor were at 4% instead of under 3%, there would be a disaster that would take years to unwind," he said.