Libor's Decline Seen as Positive

The three-month London interbank offered rate posted its sharpest drop in nearly four weeks as central banks drenched money markets with cash to spur lending.

The rate slid 10 basis points Monday, to 1.16%, according to the British Bankers' Association.

A bank panel sets the three-month Libor — the benchmark for $360 trillion of financial products worldwide, according to the association — in a survey taken typically before noon each day in London. In the United States, the rate serves as the benchmark for interest on many adjustable-rate mortgages, as well as for bonds backed by credit card debts.

The drop sent the Libor-OIS spread, the difference between the three-month Libor for U.S. dollars and the overnight indexed swap rate, to its lowest point since the September failure of Lehman Brothers.

"It finally gives an indication of movement among risky asset classes," said Michael Rottman, the head of fixed-income research at Unicredit Markets and Investment Banking in Munich. "Complete normalization is not in the pipeline, but at least this should help."

Policymakers are providing cash to banks and cutting interest rates to spur lending, which began to seize up in August 2007 after BNP Paribas SA halted withdrawals on three funds, because it could not value their holdings. Lehman's demise made the situation even worse.

The Libor-OIS spread, a money market stress measurement favored by former Federal Reserve Board Chairman Alan Greenspan, dropped to 98 basis points Monday, from a peak of 364 basis points on Oct. 10. The last time it closed at less than 100 basis points was Sept. 12, the last working day before Lehman filed for bankruptcy protection.

The spread averaged 9 basis points in the year before the credit freeze started in 2007. Mr. Greenspan said in June that the spread should serve as a measure for determining when markets have returned to normal.

The U.S. housing slump that began in 2007 prompted policymakers worldwide to cut interest rates to unlock credit markets and spurred governments to rescue their biggest banking companies. The Fed cut its target to a range of zero to 0.25% last month.

In a sign that credit remains scarce, overnight deposits placed with the European Central Bank by financial institutions jumped to a record of more than $421 billion at the end of last week.

Dominique Strauss-Kahn, the International Monetary Fund's managing director, said the Libor-OIS spread may narrow to about 80 basis points in the next three months. Mr. Greenspan has said a narrowing to 25 basis points would be viewed as positive.

Forward markets signal the spread will shrink to 32 basis points by September of next year.

The TED Spread, the difference between what the U.S. government and banks pay to borrow for three months, fell 11 basis points Monday, to 109 basis points, the lowest level since Sept. 5.

The euro interbank offered rate, or Euribor, which banks say they charge each other for three-month loans, dropped 4 basis points, to 2.65%, to the lowest level in almost three years, the European Banking Federation said.

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