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Wednesday, October 08, 2008

You'll Know What 'Libor' Is After Reading This

By Dunstan Prial

FOXBusiness

Libor was once an obscure term to casual observers of our global financial markets.

But like so many other erstwhile obscurities -- credit default swaps, mortgage backed securities, cash to credit ratios, just to name a few -- Libor is starting to pop up in water cooler conversation.

Libor, or the London interbank offered rate, is the rate London banks charge each other to borrow money in American dollars overnight.

If the rate goes up, which it has precipitously in recent days as the global credit crisis has worsened, it means those banks are charging more to borrow in American dollars because they believe the likelihood of getting paid back has diminished.

“Libor is extremely important. It’s a fear gauge. When Libor is high it means fear is high and trust is low,” said financial planner Chris Ciavacco, head of Ciavacco Capital Management in Atlanta.

The rate shot up three days in a row this week to 5.38% before world central banks announced a coordinated rate cut early Wednesday.

And that’s hardly surprising, given that American banks are failing and seeking government bailouts at a rate unseen since the 1930s.

So, in other words, the Libor is a good measure of how global markets view the current state of U.S. finances. And that view is currently not good.

Some analysts believe Wednesday’s global rate cut could ease fears and push the Libor rate lower.

Ciavacco said investors around the world are watching the rate closely.

“It’s an imperfect but legitimate gauge,” he said. “Nothing is gonna happen until Libor comes down. There will be no sustained rally in stocks until those spreads come down.”

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