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Sunday, October 12, 2008


stubborn LIBOR

futures are up overnight on reaction to eurozone meeting results, particularly a plan to guarantee interbank lending -- something intended to clear the logjam that manifests in a sky-high LIBOR by restoring some semblance of confidence to that market.

not so fast, via yves smith -- and following up on earlier discussion:

Too much central bank liquidity has destroyed the inter-bank lending market. This would be an “inside baseball” issue for the banking system except Libor is the benchmark for the “real economy” to get a loan. Libor is written into contracts and we have no good substitute. If Libor is screwed up, then the real economy pays because it needs Libor to get a loan.

This also means the market’s new favorite idea of having G7 countries guarantee all inter-bank loans will do nothing. If enacted, banks would still be missing an incentive to use the inter-bank loan market because they can get all the funding (loans) they need from their neighborhood central bank and at a much lower rate.

by lending copiously at very low rates, central banks have become the interbank game. the intention must be to foster recapitalization, as pointed out in the comments, keeping dead banks alive.

it will be exceedingly interesting to see the effect, if any, on LIBOR on the heels of political statements. with virtually no business having been transacted at LIBOR beyond overnight for some time now, i cannot easily see why banks would go back to the peer-to-peer model.

UPDATE: monday defying concerns and up 6% in equities midday -- but LIBOR does not retreat. ft excerpts a citi note suggesting that, even in the aftermath of bank stabilization, we could be seeing "financial pre-conditions of a depression".

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