Libor falls to lowest rate since credit crisis began

04 January 2008 / by None
On what some are calling the first fixing day of 2008, the Libor – the rate at which banks lend to each other – dropped on Wednesday to its lowest since the beginning of the credit crisis in August last year, easing the liquidity drought which caused the collapse of Northern Rock.

In September, the Libor was at 6.9 per cent, 115 points above the base rate of 5.75 per cent. It dropped 10.375 basis points this week to 5.89 per cent, just 39 basis points above the current base rate of 5.5, partly as a result of central banks in the UK, US, Switzerland, Canada, and the Eurozone which last month pledged to inject the markets with $600 billion of emergency funding.

Since the crises broke last summer, banks have been reluctant to lend to each other as a result of concerns regarding losses related to the sub prime mortgage crisis in America, the main contributor to the run on Northern Rock, which ran into difficulty because it relied heavily on financing from money markets rather than deposits.

While it is hoped that this drop in the Libor will ease liquidity problems, there is still much cause for concern amongst the global markets. The price of crude oil hit $100 a barrel this week and the value of gold shot up to an all time high as investors poured money into the commodities markets following worsening fears about the weakness of the dollar.

Gold has risen to $861.10 a troy ounce, surpassing the previous record high of $850 which was set in 1980. The rising value of gold has also encouraged the strength of platinum which now stands at $1,544 a troy ounce.

Another consequence of the credit crisis is that loan companies are seeing a drop in the amount of loans raised. They fell by 8 per cent last year, from $650 billion in 2006 to $600 billion in 2007.

Lower grade debt has fallen considerably as a result of loan providers tightening their lending criteria to those with bad credit, but there has been a rise in demand for investment in safer corporate bonds, which reached an all time high of $2,000 billion in 2007.

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