Three-Month Dollar Libor Rises to a Seven-Year High

Three-Month Dollar Libor Rises to a Seven-Year High (Update2)

By Anchalee Worrachate

Sept. 5 (Bloomberg) -- The rate banks charge each other to borrow in dollars for three months rose for a 10th day as concern about losses on securities linked to U.S. subprime mortgages kept lenders from offering cash for any time longer than a few days.

The London interbank offered rate, or Libor, increased to 5.72 percent, the highest since January 2001, from 5.70 percent yesterday and 5.36 percent at the end of July, the British Bankers Association said today. Other short-term rates also rose, including the three-month rate for the euro, which climbed to 4.76 percent from 4.74 percent, its highest since 2001.

Lending rates have risen so fast that the Bank of England today offered to provide additional cash to ease the squeeze on borrowing and the European Central Bank said it may act tomorrow to soothe money markets if needed. The moves came amid concern banks may be sitting on undisclosed losses as a result of late payments by homeowners with poor credit histories.

``I've been in this market for 15 years, and I've never seen any thing quite as bad,'' said Joerg Vogt, director of euro trading at Deutsche Bank AG in Frankfurt. ``It's a bid only market, and the repo market for most of non-government paper is practically shut down.''

The three-month dollar Libor rate is about 47 basis points above the Federal Reserve's target federal funds rate. Over the past five years, the rate has averaged 21 basis points more than the benchmark rate. Fed funds, the U.S. overnight lending rate for loans between banks, opened at 5 5/16 percent today, above the Fed's target of 5 1/4 percent.

ECB `Monitoring Situation'

Investor aversion to securities backed by home loans has spread to other high-yield, high-risk corporate bonds, making it harder for companies to raise money. Three-month Libor is a benchmark for corporate borrowing, with most floating-rate notes tied to the rate.

``Volatility in the euro money market has increased and the ECB is closely monitor1ing the situation,'' the Frankfurt-based bank said in a statement today. ``Should this persist tomorrow, the ECB stands ready to contribute to orderly conditions.''

The overnight rate for euro climbed to 4.68 percent today, from 4.44 percent, also the highest in six years and its 10th consecutive increase.

``The tightness we've seen in the European market this morning is feeding into pressures in the U.S. market,'' said Lena Komileva, economist at Tullett Prebon in London. ``The rates are increasing because banks are anticipating a credit crunch in coming weeks.''

`Right Direction'

U.K. commercial banks today increased their forecast for how much they will deposit with the central bank next month by 6 percent to 17.6 billion pounds ($35.4 billion). The London-based central bank said it will offer to lend as much as 25 percent of that on Sept. 13 at the benchmark interest rate, currently at 5.75 percent, instead of its usual higher penalty rate.

The overnight is ``unusually high,'' the Bank of England said in a statement. The Libor rate for the pound dropped to 5.91 percent, from 6.11 percent yesterday.

``It's a step toward the right direction,'' said Nick Stamenkovic, strategist at RIA Capital Markets in Edinburgh. ``I don't think this measure will solve the credit crunch problem, but it sent the right signal to the market.''

The Fed lowered its discount rate by 0.5 percentage point to 5.75 percent on Aug. 17 to ease a shortage of cash in money markets.