RISING concern over the exposure of banks to the highly-indedbted European countries has seen the rate at which banks lend to each other rise to its highest level since August.
The key three-month US dollar London inter-bank offer rate, or Libor, rose 0.46000 per cent yesterday from Friday’s 0.44506 per cent. The euro rate rose to 0.63125 per cent from Friday’s 0.62875 per cent. The sterling rate, however, eased to 0.69625 per cent from 0.69750 per cent.
Libor is significant because the rate increased in the run-up to the financial crisis, and serves as a warning that a credit crunch could be in the offing.
Analysts believe that the creeping increase is down to fears that the €750bn (£642bn) bailout facility is not enough to stave off a full-blown crisis in the single currency bloc.
The cross-currency swap market, which is more liquid than Libor, also suggests that fears over the fiscal situation in Europe’s weaker countries have not subsided. Before the crisis, traders paid an extra 60 basis points to swap euros for dollars. That rose to 102bps before the bailout, before falling to 94bps last week.
City A.M. Reporter