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The cost of borrowing in US dollars for three months in London fell the most in almost four weeks as central banks drenched money markets with cash to spur lending.
The London interbank offered rate, or Libor, for such loans slid 10 basis points to 1.16 per cent yesterday, the steepest decline since December 17, British Bankers' Association data showed. The drop sent the Libor-OIS spread, a measure of money-market stress favoured by former Federal Reserve chairman Alan Greenspan, to its lowest since the September failure of Lehman Brothers Holdings.
Policymakers are providing cash to banks and cutting interest rates to spur lending, which began to seize up in August 2007.
The Libor-OIS spread, the difference between the three-month Libor for dollars and the overnight indexed swap rate, dropped to 98 basis points yesterday, from a peak of 364 basis points on October 10.
The last time it ended the day at less than 100 basis points was September 12, the last working day before Lehman filed for bankruptcy.
The spread averaged nine basis points in the year before the credit freeze started in 2007. Greenspan said in June last year the spread should serve as a measure for determining when markets have returned to normal.
In a sign credit remains scarce, overnight deposits placed with the European Central Bank by financial institutions jumped to a record of more than 315 billion ($747 billion) at the end of last week.
The daily average in the first eight months of last year was 427 million.
Meanwhile, International Monetary Fund managing director Dominique Strauss-Kahn said in Washington that European leaders had not grasped the depth of the coming slump in the region. He said the IMF might need a further US$150 billion ($267 billion) to help to counter the slowdown to emerging markets.
- BLOOMBERG
