EURIBOR

The cost of borrowing in dollars in London rose to the highest level in almost two weeks on concern policy makers have run out of room to lower interest rates after cutting them to near zero.

The London interbank offered rate, or Libor, for three- month loans climbed three basis points to 1.16 percent today, the highest level since Jan. 12 and its second consecutive increase, the British Bankers’ Association said. The overnight rate advanced two basis points to 0.21 percent.

“We’re getting to a crossroads,” said Sean Maloney, a fixed-income strategist at Nomura International Plc in London. “There’s not much further the Federal Reserve can go. It’s unclear whether the progress we’ve made so far is mostly due to improvements in the private sector or central bank efforts to bring in liquidity. We may have reached saturation point.”

After seven weeks of declines, Libor, the benchmark rate for $360 trillion of financial products worldwide, is rising as financial companies remain plagued by losses and central banks reach the lower limits for setting interest rates. The Fed reduced its target rate to between zero and 0.25 percent last month. Japan left its benchmark rate at 0.10 percent today.

Concern governments will nationalize financial institutions amid losses and writedowns that have surpassed $1 trillion since the start of 2007 is spurring lenders to hoard cash. Royal Bank of Scotland Group Plc, the biggest bank controlled by the U.K. government, said Jan. 19 it may post an annual loss of as much as 28 billion pounds ($39 billion), a record for a U.K. company.

‘Discernable Decline’

“Since the news of the RBS loss, there has been a discernable decline in money-market liquidity,” Calyon analysts led by David Keeble, the London-based global head of interest- rate strategy, wrote in a note today.

Bank of England Governor Mervyn King said this week officials may start buying government assets to bolster lending and Prime Minister Gordon Brown announced his second rescue plan in three months.

Central banks cut interest rates and offered unlimited amounts of cash to unlock a collapse in lending that’s squeezing companies and consumers worldwide, driving the world into its worst economic slump since the Great Depression. The Organization for Economic Cooperation and Development said Nov. 25 the economy of its 30 members will contract 0.4 percent in 2009 after expanding 1.4 percent last year.

Companies in Europe pay an average 408 basis points more than government debt to sell bonds, Merrill Lynch & Co.’s EMU Corporate Index showed today, compared with 119 basis points at the end of 2007.

Libor-OIS Spread

Measures of money-market stress including the TED spread and the Libor-OIS spread, snapped declines. The TED spread, the difference between what the government and companies pay for loans, rose four basis points to 105 basis points today. The Libor-OIS spread, a gauge favored by former Fed Chairman Alan Greenspan, increased one basis point to 94 basis points.

The difference between the three-month dollar Libor and the upper end of the Fed’s interest-rate target climbed three basis points to 91 basis points today. It was as high as 332 basis points on Oct. 10 after Lehman Brothers Holdings Inc. filed for bankruptcy. It averaged 12 basis points in the year before the credit crisis began in August 2007.

The Libor is set through a survey of banks typically before noon each day in London by the BBA. Euribor is set by an EBF panel earlier in the day.

New Benchmarks

The credit crisis threw the spotlight on Libor last year because the BBA publishes the names of contributors and their rates, giving lenders an incentive to underestimate borrowing costs to keep from appearing like they are in financial straits. The Basel, Switzerland-based Bank for International Settlements said in March some lenders may have “manipulated” rates.

Some borrowers responded by tying the rates they pay on loans to other gauges, including credit-default swaps. Switzerland’s Nestle SA, the biggest food producer, Espoo, Finland-based Nokia Oyj, the largest mobile-phone maker, and FirstEnergy Corp., the Ohio-based owner of electric utilities, last year arranged credit facilities linked to the derivatives, which are used to bet on borrowers’ likelihood of default.

The three-month Libor for pounds fell to 2.20 percent, or the lowest in the rate’s 23-year history, the BBA said today. The euro interbank offered rate, or Euribor, for three-month loans dropped six basis points to a more than three-year low of 2.25 percent, the European Banking Federation said.

The odds of a 25-basis-point rate cut at the European Central Bank’s next meeting on Feb. 5 rose to 80 percent, according to a Credit Suisse Group AG gauge of probability.

ECB President Jean-Claude Trichet signaled on Jan. 15 policy makers will avoid a cut at the February meeting. On Jan. 16, he ruled out the prospect of rates falling to zero.