UPDATE 2-Libor falls as rescue plans bolster confidence
(Adds Libor fixings, quotes, comment, background)
LONDON, Oct 13 (Reuters) - The interbank cost of borrowing in sterling, euros and dollars fell on Monday as confidence in money markets showed signs of returning as European governments took sweeping action to support the creaking banking system.
Three-month euro Libor posted its biggest decline this year and three-month dollar Libor had its steepest fall since March, the British Bankers Association's daily fixing of London interbank offered rates (Libor) on Monday showed.
Libor, the global benchmark for corporate, financial and household borrowing, showed declines across the currency spectrum and most time horizons.
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.
This suggests the wide range of bailouts, guarantees and liquidity injections that could potentially run into trillions of dollars might mark a turning point where frozen money markets begin to thaw and banks slowly start lending again.
"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," BNP Paribas strategists said in a note on Monday.
"Governments and central banks are regaining control via further exceptional measures. Guaranteeing interbank lending is crucial to improve financial market conditions," they added.
Three-month euro Libor fell to 5.29875 percent from 5.36625 percent EUR3MFSR= on Friday, the BBA's fixing on Monday showed, the biggest one-day fall since Dec. 28 last year.
Three-month dollar Libor was fixed 6.625 basis points lower at 4.75250 percent USD3MFSR=, the biggest fall since March 17.
The three-month dollar, euro and sterling Libor/OIS spreads all narrowed, having hit historic highs last week.
For more on Monday's Libor fixings, see [ID:nLD281678].
TIME
European governments have said they will buy stakes in banks and offer guarantees for bank-to-bank loans for a limited period in order to bring paralyzed money markets back to life. Continued...
