Wednesday, July 18, 2012

Li-bor[ed] to distraction

Journalists and politicians may be fooled into paroxysms over the let's make believe LIBOR, but as this May 2012 piece in Bloomberg makes clear, markets are made of sterner stuff;

Barclays Plc (BARC), Britain’s second- biggest bank by assets, says the interest rate it pays for short-term dollar loans is the lowest ever relative to rivals even as other measures of its credit deteriorate.
Barclays says it can borrow for three months at 0.3 percent in its submission for the London interbank offered rate, compared with the 0.466 percent composite level of the British Bankers’ Association’s measure. The 17 basis-point gap is a record after Barclays reported the biggest decline this year in the rate of the 18 banks contributing to the benchmark for $360 trillion of global securities.
While Barclays says its credit is getting better, the cost of insuring the U.K. lender’s debt has risen 16 percent since Feb. 24, when its Libor contributions started diverging from the combined rate. Prices of credit-default swaps tied to London- based Barclays are worsening as the 10 biggest prime U.S. money- market mutual funds cut their holdings in its short-term debt by $6.65 billion in April, the biggest drop in dollars of any bank.
“There’s a subjective element to Libor,” which “represents the rates at which banks would expect to be able to raise funding at,” said Harpreet Parhar, a credit strategist at Credit Agricole SA in London.
Credit-default swaps tied to Barclays’ senior debt rose 29 basis points to 202 basis points since Feb. 24, the highest level since April 10, according to data compiled by Bloomberg. Contracts protecting its junior bonds climbed 79 to 422.

The above means that financial markets knew very well what the situation was; LIBOR is all hat and no cattle.

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