Three-month LIBOR rose to its highest level since 2009 and amounted to 0.83 percent. Will lead the growth in the value of money in the interbank market to the next crash, or in this case the situation will develop in a different scenario?
Worldwide LIBOR is a benchmark, and it is often attached to it the loans with a floating rate. The volume of such loans in the global financial system is huge – it’s trillions of dollars. Obviously, a sharp increase in LIBOR leads to higher prices most of these loans, what affects the financial condition of borrowers. Yes, the current value of the LIBOR negligible – only 0.83%, however, do not underestimate the risks, because as it grows mortgage payments increase by billions of dollars.
It is worth noting that three-month LIBOR is now even higher than during the banking crisis in the Eurozone in 2011-2012.
Usually, the growth of interbank lending rates reports on the growing mistrust among banks, in other words, the growth risk of the counterparty. By the way, that with the growth of LIBOR and the financial crisis of 2008
However, there are other possible causes. The market may be laid for a rate hike from the Federal reserve system, but to confirm or deny it is impossible, because it is still unclear what the fed is going to do. Not the fact that the officials themselves know that.
Another possible reason for the growth of interbank rates – reform of money market funds in the USA which will come into force in October. With this many experts link the current trend and I believe that this is a temporary phenomenon. Maybe it is, but the fact that such a sharp increase in interest rates on the interbank market has never remained unnoticed by the market and negative effects you can expect literally at any time.
Investors also pay attention to an indicator such as the TED spread – the difference between three-month LIBOR and yield of three-month Treasury bills.
Treasury securities are considered risk-free asset and the interbank rate reflects the degree of trust between banks. Thus, the increase in TED spread indicates higher credit risk or credit tension. If default risks are increasing, investors are beginning to invest in safe assets. It is necessary to focus on the fact that if the market was based on growth rate, it would increase not only LIBOR, but would grow and the yield of treasuries. Now it is not.
In General, now on the market without the participation of the Federal reserve is tightening credit conditions. It only remains to wait for the consequences.
What is LIBOR
This is the London interbank offered rate (London Interbank Offered Rate, LIBOR). The weighted average interest rate on interbank loans provided to banks exposed in the London interbank market with the offer of funds in different currencies and for different terms – from one day to 12 months.
LIBOR is calculated for ten currencies: us dollar, Euro, British pound, Australian dollar, Danish Krone, new Zealand dollar, Swiss franc, Japanese yen, Swedish Krona and canadian dollar.
