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Monday, September 17, 2007

Three Month Euro Libor Rates

Well try as they may, they just can't shift those three month rates. According to Bloomberg late last week:

The London interbank offered rate, or Libor, for euros fell 13 basis points to 4.01 percent today, according to the British Bankers' Association. The three-month rate held near a six-year high of 4.73 percent. The ECB's benchmark rate is at 4 percent.

(some explanation of what all this is about can be found in this post).

On Wednesday the ECB injected an extra 75 billion euros ($104 billion) into the markets for three months in an attempt to ease the credit drought. To date this still isn't working. From a macro perspective - as opposed to that of the currency traders - the ECBs decision to hold rates steady last Thursday is essentially irrelevant. The ECB simply has not proved capable of avoiding a sudden sharp tightening of effective short term rates in the eurozone. So all Sarkozy's fractious little spats only serve to establish that he really doesn't know too much of what he tries to talk about.

With the euro heading upwards - who knows, maybe Greenspan will help push it thru the 1.40 to the dollar this very week - downside risks start to show all over the place. A big slowdown in Germany and Italy is now pretty much guaranteed. Remember the upward march in the currency is also an indirect form of "tightening". The big question is whether all the housing nerves will really send Spain hurtling down, or whether she will manage to resist. Certainly the government here appears to be frantically upping spending as quickly as it can to try to offset the impact of the housing loans freeze up. Looking out of my window, I don't see too many cranes moving, and those that are seem to be going painfully slowly. The decision of the Spanish banks, almost unanimously, to restrict lending to 80% of valuation will make it very difficult to sell in the key first time buyer market for some years I think - previously mortgages were running as high as 110% to cover notary fees and furniture, young people here, remember, have virtually no savings, that's why the bars and restaurants sector has been booming, to mention nothing of the small car market. So whichever way you look at it, the housing boom isn't coming back any time soon. Still with a government - who has been running balanced books for many years now - in the mood to spend, spend, spend, maybe this time Catalonia really will get all that infrastructure it truly needs and deserves. Every storm cloud, as they say, has its silver lining.

So, I think, the eurozone is where you need to watch as winter approaches. Make sure you get your overcoat out early this year. The eurozone (and of course Japan) is where the all the big downside risks really are - and doubly so if the EU9 have all those already well anticipated problems.

I will try and find time to get a chart on Libor up later today, but things are, well, hectic right now.

The BBA link to the libor data is here.

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