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"LIBOR Should Ease On Central Banks' Cut"
Javier Espinoza, 10.08.08, 9:30AM ET,
Forbes.com

LONDON - The rate at which banks lend money to one another should ease Thursday, after central banks around the world launched a coordinated interest rate cut of 50 basis points on Wednesday to stem the financial crisis and ease money markets.

The overnight dollar London interbank offered rate, or libor, which measures the rate of lending in dollars between banks, rose to 5.38% on Wednesday, from 3.94% on Tuesday, the British Bankers' Association said. The spread for three-month lending in dollars also widened on Wednesday, to 317 basis points, from 295 basis points. But analysts expect the rate, which is published once a day, to drop Thursday.

"The central banks' coordinated action is a positive sign for the interbank lending markets, which are trading slight lower. But there has been a 2.0% gap between bank rates and the libor, which reflects a lack of liquidity in the interbank lending markets," said Peter Scullion, a currency analyst with Nomura in London.

"We need this gap to come down and I would expect the gap to be lower tomorrow when we get the daily libor rate. We have seen a rally in the markets but we still have to see how the actual mechanics of the British banking bailout will work," he said. On Wednesday the British government also announced that it was spending $87.0 billion to buy equity stakes in some of Britain's biggest banks to help keep them solvent. (See "Bailout For British Banks.")

Dealers were saying that the coordinated central bank action had proved successful in terms of guiding desired currency movements, according to TradeTheNews, but the global financial crisis was treading in untested waters.

"These efforts will put more money in the currency market, which has been heavily sold over the last couple of weeks," Scullion said. The dollar rose sharply against the Australian dollar and South Korean won on Wednesday afternoon in London, though it fell by 1.8% against the Japanese yen, to 99.675 yen, from 101.58 yen late Tuesday.

Over the last three weeks, since Lehman Brothers Holdings filed for Chapter 11 bankruptcy in the U.S. and several Wall Street banks have gone to the wall due to bad investments in the U.S. subprime mortgage market, global shares have been extremely volatile. Some indexes in Europe and in the U.S. have seen their largest daily drops in 20 years.


Central Banks Act