The (Libor) has fallen from recent highs. Overnight Libor (denominated in US dollar) was 5.09% a week ago and as high as 6.88% after the $700 billion bailout plan was approved. This week, the overnight rate fell to 2.14% Wednesday and continued to fall to 1.94% Thursday—moving closer to the fed funds target rate at 1.5%. Three-month US dollar Libor eased for the fourth consecutive day to 4.50% on Thursday.
Libor, derived from a daily-published average of select interbank lending rates, is the world's most widely used benchmark for loans ranging from overnight to one-year. Libor rates rise when banks charge higher rates to each other, possibly out of fear loans may not be easily repaid. Banks and lending institutions around the world typically base interest rates on loans to individuals and businesses using Libor plus some percentage point increase. An increasing Libor makes all types of consumer and business loans (including interest-rate only mortgages, credit card debt, and capital loans) more expensive, reducing liquidity and slowing economic growth.
Governments around the world have taken aggressive steps in the last couple weeks to loosen near-frozen credit markets in efforts to stabilize the distressed financial system. European governments concurrently announced financial rescue packages to recapitalize domestic banks, while key central banks coordinated emergency rate cuts. Following on last week's actions, the US announced Tuesday a $250 billion injection for banks and Switzerland this Thursday a toxic-asset rescue fund to UBS and Credit Suisse Group (which elected to raise its own capital). These are just a few of many recent initiatives. Some see the easing of Libor rates around the world as these concerted government measures are helping. It's hard to say if the current Libor direction is a short-term trend and if rates will spike up again or continue to fall. But the fact is credit conditions seem to be improving and not worsening in the last days.
The effects from more benign Libor rates will likely take some time before they are seen or felt—after all, most global economies were insulated for a period before tight credit markets really had a widespread impact. Still, if tight lending has exacerbated the current financial crisis like many believe, an ease could help a quicker recovery.
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