Libor has biggest drop in eight weeks

The cost of borrowing in dollars for three months between banks dropped the most in eight weeks as government and central bank efforts to unlock credit markets showed signs of bearing fruit.

The London interbank offered rate, or Libor, for such loans fell almost three basis points to 0.85 percent today, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of the unwillingness of banks to offer each other cash, narrowed three basis points to 65 basis points, the lowest level since June 16.

Libor, a benchmark gauge for about $360 trillion of financial products around the world from student loans to mortgages, has tumbled as the US government and the Federal Reserve pledged $12.8 trillion to drag the economy out of its longest recession since the 1930s.

“I wouldn’t say that nothing can stop Libor’s fall, but there isn’t enough out there to cause any big panic,” said Padhraic Garvey, head of investment-grade debt strategy at ING Groep NV in Amsterdam. “So far so good.”

Libor hasn’t fallen so much since March 19, the day after the Fed said it would buy as much as $300 billion of US government bonds and step up purchases of mortgage and agency bonds to revive growth.

Bank Deposits
The rate of decline accelerated even as stocks fell worldwide on concern the recovery from the global recession will falter. The MSCI World Index fell for the fourth-consecutive day. The economy may face near-stagnation for 10 years, similar to Japan’s “lost decade” in the 1990s, Nobel Prize-winning economist Paul Krugman said at a forum in Taipei today.

The decline in Libor has less to do with rising confidence among financial institutions than it does with surging customer deposits, according to Jim Vogel, an analyst at FTN Financial. While the rate dropped, deposits at U.S. banks jumped by almost $400 billion in the past six months. The increase in deposit funding has reduced demand for loans in the interbank market, Vogel said.

Royal Bank of Scotland Group Plc quoted the highest rate today for borrowing dollars for three months, at 0.96 percent. Deutsche Bank AG contributed the lowest, at 0.70 percent. It’s the first time all banks in the panel gave rates below 1 percent, the BBA data showed. The difference between the highest and the lowest rate was 26 basis points, down from 30 basis points yesterday.