An Old Friend Is Back

It's our old buddy the LIBOR, and he's getting bigger and bigger as the Greek Fire is causing the rates at which banks loan to one another to go up as the credit squeeze of 2009 is looking to make a comeback in 2010.

The rate banks pay for three-month loans in dollars rose to the highest in almost nine months as Europe’s near-$1 trillion support plan in the wake of Greece’s budget crisis failed to encourage banks to step up lending.

The London interbank offered rate, or Libor, for such loans rose to 0.43 percent today from 0.423 percent yesterday, the most since Aug. 17, according to data from the British Bankers’ Association.

The European bailout has prevented Libor from jumping even further, said Christoph Rieger, co-head of fixed-income strategy at Commerzbank AG in Frankfurt, though it has failed to fully offset concern that Europe’s sovereign-debt crisis is hurting the quality of loan collateral. Libor rises when banks become more hesitant to lend to potentially risky counterparties.

“The EU’s package has kept rates from spiralling out of control,” Rieger said by phone. “The EU package has put a cap on the rate rise, but there’s no pressure on rates to go lower. There were some European banks who were finding it more difficult” to obtain dollar funding, he said.

It's deja vu all over again, folks.  Keep a careful eye on that LIBOR number.  Anything above a full percentage point means bad, bad news ahead.  Granted, it may take a while for it to happen...but it's not looking good for the economic road ahead.