The London interbank offered rate for three-month dollar loans is dropping at the fastest pace since January as bankers gain confidence that the worst of the financial crisis is over.
Debt strategists at Credit Suisse Group AG, Societe Generale SA and Royal Bank of Canada, three of the 16 banks that provide the data that sets Libor each day, say the declines will continue. Momentum may be building as signs of economic stability emerge, according to Federal Reserve Chairman Ben S. Bernanke.
“Not so long ago the main worry was whether the bank you’re dealing with was going to be around in three months time,” said Ira Jersey, head of U.S. interest-rate strategy at RBC Capital Markets in New York. “Now that concern is on the back burner. We’re going to see Libor coming down steadily.”
Libor, the British Bankers’ Association interest rate that determines borrowing costs on about $360 trillion of financial agreements ranging from home mortgages to corporate bonds, fell to 1.12 percent today from 1.32 percent a month ago. The fastest drop since the start of the year, when the rate tumbled to 1.08 percent on Jan. 14 from 1.42 percent nine days earlier, coincides with President Barack Obama’s efforts to restore the economy and the banking system to health.
A big issue for many financial institutions over the last year and a half is the viability of the counter-party. That is, "if I lend you money, will you be around in the next three months to repay the loan?" That is what essentially froze the credit markets. Now that we've seen the government pour trillions into the system, people are now more and more confident that a counter-party will be around. And that has increased confidence.
