Libor rates start to ease

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Oct 14: Money-market rates in London fell after the US joined the UK, Germany and France in offering to buy stakes in banks to restore confidence in the global financial system.

The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans slid 12 basis points to 4.64% on Tuesday, the biggest drop since March 17, according to the British Bankers’ Association. It was at 4.82% on October 10, the highest level since December. The three- month euro rate fell 7 basis points to 5.23%, the largest decline since December 28.

“The US will inject $250 billion into banks through preferred stock purchases, with nine big banks already having agreed to participate in the programme,” treasury secretary Henry Paulson said on Tuesday. The spending is part of the $700 billion in government support approved by Congress on October 3. The measures follow similar moves by European leaders to unlock credit markets by helping beleaguered banks.

“What everyone was crying out for was a coordinated central policy response, and that’s what we got,” said Patrick Bennett, a currency strategist with Societe Generale SA in Hong Kong. “What we had was a lack of confidence in the money markets. I think it’s starting to thaw.” While the three-month dollar rate declined, it is still 314 basis points more than the Federal Reserve’s target of 1.5%. The difference was a record 332 basis points on October 10 and 82 basis points on September 15, the day Lehman Brothers Holdings Inc collapsed.

The US will invest about $125 billion in nine banks as part of the rescue, including Citigroup Inc, Goldman Sachs Group Inc, Morgan Stanley and State Street Corp in exchange for preferred shares, people familiar with the plan said earlier European and the US governments may spend as much as $3 trillion to unfreeze credit markets, meet demand for dollars and shore up banks.

The European Central Bank on Tuesday lent banks 310.4 billion euros ($427 billion) for seven days. That’s the most since December 2007, when it added an unprecedented 349 billion euros to the banking system.