Not a good sign

*Libor-OIS spread should be around .25%. That would mean that banks don't consider each other that much of a risk. This increase, albeit small, can be quite large in the big scheme of things. I will try and post some extended explanations on Libor and and TED spreads and why they matter over the weekend.


Libor climbs as global recession worsens
Libor has reached 1.33%, up from the 2008 low of 1.08% in mid-January, according to the British Bankers' Association. The creep comes as efforts to bolster the financial system produce few results and the economic downturn deepens. "The market is beginning to think that the solution is either not politically possible, or we can't afford it, or maybe there isn't a solution," said Bob Baur, chief global economist at Principal Global Investors. Libor's increase "is just another indication of that concern." Bloomberg (11 Mar.)

March 11 (Bloomberg) -- The cost of borrowing in dollars is rising as the global recession deepens and central bank efforts to prop up the financial system fail to prevent a growing number of banks from requiring government bailouts.

The London interbank offered rate, or Libor, that banks say they charge each other for three-month loans stayed at 1.33 percent today, near the highest level since Jan. 8 and up from this year’s low of 1.08 percent on Jan. 14, the British Bankers’ Association said. The Libor-OIS spread, a gauge of bank reluctance to lend, widened to the most since Jan. 9.

Short-term borrowing costs are increasing as banks hoard cash and governments struggle to thaw credit markets after finance companies reported almost $1.2 trillion of writedowns and losses since the start of 2007. Banco Popolare SC yesterday became Italy’s first lender to seek state aid. Lloyds Banking Group Plc, the U.K.’s largest mortgage provider, ceded control to the government March 7. U.S. regulators seized 17 failing banks so far this year.

“The market is beginning to think that the solution is either not politically possible, or we can’t afford it, or maybe there isn’t a solution,” said Bob Baur, chief global economist at Des Moines, Iowa-based Principal Global Investors, which manages $198 billion of assets. Libor’s rise “is just another indication of that concern,” he said. full article...