Thursday, October 9, 2008

Rising Libor Defies Global Interest Rate Cuts

Three-Month Libor rose again to 4.75%, as global central bank interest rate cuts had little affect on banks willingness to lend to each other.  Meanwhile, Iceland's government seized control of Kaupthing Bank, the nation's largest lender, completing the nationalization of the country's banking industry.  Iceland's banks were saddled with $61 billion in debt, 12 times the size of the economy according to Bloomberg.  The government is seeking a loan from Russia and may ask the IMF for help guaranteeing deposits.  Pegging the krona to the euro apparently lasted less than a day and all trading in Iceland's equity markets is suspended until October 13th.

My reasons for writing about Iceland are twofold.  First, Iceland's problems are a fantastic lesson in the consequences of allowing too much leverage in a country's banking sector.  Assets at Iceland's three biggest banks have grown five-fold since 2004 and were financed primarily from debt sales not domestic deposits.  More importantly, I am writing about Iceland to make everyone in the US feel a little bit better about the current debacle taking place in front of our eyes every day when we pick up the paper.  Despite all of the turmoil in our markets, it could obviously be alot worse.  We could live in Iceland and be extremely pissed-off at the three banks that basically tanked our economy due to excessive greed.  In the US, we can spread the hate around to Wall Street for its greed, the government for its lack of supervision of Wall Street, and maybe a few real estate flippers that lied about their incomes to buy 17 condos in Florida.  So if you think things are bad, they are way worse elsewhere.  The US stock market is down considerably less than others, and, despite everything, global markets consider Treasury securities as the safest assets in the world.  Amidst the global panic, investors the world over are still flocking to Treasuries, which is nice, because we have lots of Treasuries to shovel down their throats to finance all of our government bailouts.         

1 comment:

PR said...

Both 1-Month and 3-Month Eurodollar LIBOR yields are above the U.S. Prime Rate right now. There are lots of American families who are struggling to pay their bills, and who also have an ARM tied to LIBOR. Housing situation improving any time soon? Doubt it. Spike in foreclosures on the way? Probably.