The cost of borrowing in dollars between banks for three months had its biggest weekly drop this year as central-bank cash injections and interest-rate cuts made financial institutions less wary of offering credit.
The London interbank offered rate, or Libor, for such loans was little changed at 0.66 per cent today, bringing its decline this week to 17 basis points, the most since the five days through December 19th, when it fell 42 basis points, according to data from the British Bankers’ Association.
Libor is used to set borrowing costs on about $360 trillion of financial products globally, according to the BBA.
“Overall it shows conditions in the money market have improved and lending has become easier,” said Karsten Linowsky, a fixed-income strategist in Zurich at Credit Suisse Group AG, Switzerland’s biggest bank by market value.
“The financial system is improving and lending between banks is working again. It puts the economy in a better condition.”
Bank of Japan Governor Masaaki Shirakawa said today the world’s second-largest economy is emerging from “freefall,” after the central bank raised its outlook for the economy for the first time in almost three years.
Bank of America secured about $13.5 billion in a sale of common stock this week, while JPMorgan Chase & Co. said it aimed to repay government cash by exiting the Troubled Asset Relief Program “in the next few weeks.”
The Federal Reserve committed $12.8 trillion to stem the longest recession since the 1930s and central banks around the world cut interest rates to near zero. Libor rose to 4.82 per cent in October in the wake of Lehman’s collapse on September 15th.
The TED spread, the difference between what banks and the US Treasury pay to borrow for three months, was 49 basis points today, near the lowest level since August 2007, when the credit crisis began.
The Libor-OIS spread, another gauge of banks’ reluctance to lend, held at 46 basis points, the least since February 2008. The rate averaged 11 basis points in the five years preceding the financial crisis.
“The global economy has turned the corner, and the worst is now behind us,” Marco Annunziata, chief economist in London at UniCredit SpA, wrote in a client note. “A moderate dose of optimism can no longer be dismissed as foolishness.”
Libor is derived from a survey of banks conducted by the BBA each day in London. Institutions are asked how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies from dollars to euros and yen.
Bloomberg