BRITAIN'S paralysed banking system was last night showing the first tentative signs of creaking back into life, as the cost of borrowing between institutions fell.
Figures released yesterday showed that the important interbank cost of borrowing in sterling, euros and dollars had dropped as confidence in money markets looked to be returning.
The falls, including some of the largest declines this year, came
after governments took further sweeping action to thaw the frozen banking system.
As ministers across Europe moved to offer more support for bank-to-bank lending, the figures suggested that their actions were – at last – having some effect.
On the day a figure dressed as the Grim Reaper stalked the streets around the Bank of England, information from the City appeared to show that the first signs of recovery of the capitalist system.
The three-month euro London Inter-bank Offer Rate (Libor) posted its biggest decline this year and the three-month dollar Libor had its steepest fall since March, according to British Bankers Association (BAA) figures. Libor rates across the globe – the benchmark for corporate, financial and household borrowing – showed declines across the currency spectrum and most time zones.
The Libor premium over anticipated official borrowing costs as measured by average Overnight Index Swap rates, a key test of financial market stress, also fell.
Last night City analysts were suggesting that the wide range of bail-outs, guarantees and liquidity injections across the world were having their intended effect.
The hope was that the injection of what could amount to trillions of dollars into the financial system might mark a turning point.
A continuing lack of trust between institutions has been one of the key reasons why the action by governments has so far been unable to unfreeze the markets.
In a briefing issued yesterday, BNP Paribas strategists said: "Lower Libor fixings finally start to reflect exceptional liquidity measures taken by global central banks. Accordingly, spreads are compressing from the top experienced just a couple of weeks ago."
They added: "Governments and central banks are regaining control via further exceptional measures. Guaranteeing interbank lending is crucial to improve financial market conditions."
The three-month euro Libor fell to 5.29875 per cent from 5.36625 per cent on Friday, the BBA's fixing on Monday showed, the biggest one-day fall since 28 December last year.
The three-month dollar Libor was fixed 6.625 basis points lower at 4.7525 per cent, the largest fall since 17 March.
And the three-month dollar, euro and sterling Libor spreads all narrowed, after hitting historic highs last week.
The falls came on the back of promises by European governments to buy stakes in banks and offer guarantees for bank-to-bank loans for a limited period in order to bring paralysed money markets back to life.
But while the action, including that taken by the UK government yesterday, will go a long way to preventing systemic meltdown of the world's financial system, it will take longer for confidence to fully return to banks – and for lending to resume fully.
Libor rates are only indicative prices of where banks are lending to each other, not necessarily the levels at which lending is actually being carried out.
Data from the European Central Bank yesterday showed just how reluctant banks have been to lend to counterparts.
Eurozone financial institutions deposited a record 155 billion at the European Central Bank overnight on Friday.
