Libor Jumps Most Since January 2009 on Greek Debt ‘Fear Trade’

Libor Jumps Most Since January 2009 on Greek Debt ‘Fear Trade’
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By Keith Jenkins

May 7 (Bloomberg) -- The rate banks say they charge for three-month loans in dollars rose the most in almost 16 months as lending sputtered amid concern financial institutions are holding too many assets of Europe’s most indebted nations.

The London interbank offered rate, or Libor, for three- month loans climbed 5.5 basis points to 0.428 percent today, the highest level since Aug. 17, according to data from the British Bankers’ Association. It was the biggest increase since Jan. 16, 2009, and the 13th straight gain.

“There is clearly a fear trade starting to stalk the market,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “Questions are being asked about certain counterparties. It’s a question of what people have on their books and whether they are vulnerable to big losses.”

Banks are holding back from offering loans to counterparties amid concern European leaders aren’t doing enough to keep the most indebted nations from defaulting after a 110 billion-euro ($140 billion) rescue package for Greece failed to halt a rise in government borrowing costs. Three-month Libor is a benchmark for about $360 trillion of financial products worldwide, ranging from mortgages to student loans.

The spread between three-month Libor and the overnight indexed swap rate, a gauge of banks’ reluctance to lend, rose more than 6 basis points to 18.5 basis points, the most since Aug. 26. The Libor-OIS spread ballooned to 364 basis points, or 3.64 percentage points, after the collapse of Lehman Brothers Holdings Inc. in 2008.

‘Like Lehman’

“Banks simply don’t trust each other, just like in the aftermath of Lehman Brothers,” said Jens-Oliver Niklasch, a fixed-income strategist at Landesbank Baden-Wuerttemberg in Stuttgart.

The three-month euro interbank offered rate, or Euribor, rose to 0.682 percent today, according to the European Banking Federation. That’s the highest level since January.

Overnight deposits with the European Central Bank climbed to a 10-month high yesterday, lodging 290 billion euros at 0.25 percent, up from 288 billion euros the previous day, the Frankfurt-based central bank said. That’s the most since July 3. Deposits exceeded 200 billion euros for the past 10 days.

To contact the reporter on this story: Keith Jenkins in London at kjenkins3@bloomberg.net