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Ambrose Evans-Pritchard: Libor surge nears danger level for debt-drenched world

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Published : March 01st, 2018
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Category : GoldWire

The stress signals of the global credit system are flashing amber. The offshore dollar funding markets that lubricate world finance are facing an incipient squeeze.

The "Libor-OIS spread," watched carefully by traders, has risen to levels reached during the onset of the Chinese currency crisis in early 2016 and during the onset of the Italian and Spanish funding crisis in late 2011.

The three-month rate for dollar Libor (London Interbank Offered Rate) used to price a vast nexus of financial contracts around the world has spiked to a 10-year high of 2 percent this week. A third of all U.S. business loans are linked to Libor, as are most student loans, and 90 percent of the leverage loan market.

The U.S. can doubtless handle the sixfold rise in Libor costs over the last two years since it is a reflection of economic recovery itself. America needs tighter money: The economy is on the cusp of overheating, with a double blast of irresponsible fiscal stimulus coming from the Trump tax cuts and Republican pork barrel spending.

Whether the rest of the world can handle it is less clear. The Libor spike is transmitted almost instantly through global finance. The Bank for International Settlements says any rise in short-term borrowing costs on dollar markets resets rates on $5 trillion (L3.6 trillion) of dollar bank loans.

It tightens the whole credit structure in Asia and emerging markets regardless of what currency it is in. The Libor-OIS spread measures the extra cost that banks charge each other for short-term "unsecured" dollar loans on the London interbank market. It basically takes the pulse of the lending markets. ...

... For the remainder of the report:

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