Euro Libor declines to lowest since Lehman collapse

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 per cent on Tuesday, the British Bankers' Association said. That's the lowest level since September 12, the Friday before Lehman failed. The overnight dollar rate slid 23 basis points to 1.28 per cent, below the Federal Reserve's target for the first time since October 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 September 15. The French government will inject ¤10.5 billion ($14 billion) into BNP Paribas SA, Societe Generale SA and four other domestic banks as they tap for the first time the ¤360 billion 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 US currency as required. The ECB allotted $101.93 billion of 28-day cash at a fixed rate of 2.11 per cent, while UK 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 on Monday and 364 basis points on October 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 per cent, the highest in about a month.

The three-month dollar Libor slid 23 basis points to 3.83 per cent on Tuesday. That's still 233 basis points more than the Fed's target rate for overnight loans of 1.5 per cent, 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 UK's second-biggest bank, confirmed a report by Cazenove that the lender's ability to issue unsecured funding has improved since October 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 on Tuesday. 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 per cent, the lowest since September 22, according to data compiled by Bloomberg.