The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
ETF Expert) -- LIBOR (London Inter-Bank Offered Rate) is the interest rate that fellow European banks will charge other banks. Put another way, it is the rate at which a financial institution in the region can borrow money.
In order for banks to operate, they are consistently lending out and/or borrowing. If they cannot exchange with one another, required reserve levels could be deemed "inadequate" or investors could sour on the health of the company. A bank that cannot get access to funds from any source could find itself being taken over by a respective government, perhaps to prevent widespread withdrawals that might cripple the entity.
Why am I bringing up LIBOR trends today when S&P downgraded the sovereign debt of France? For one thing, inspite of the market's gloom-n-doom reaction, the event is not a surprise. The agency gave a 45-day warning on
15 European nations on 12/5
, and there's been very little in the way of actual debt-reducing, decision-making since that day.
More importantly, the biggest reason for addressing LIBOR is that the widely tracked "3-month" has been steadily easing for nearly a week, six trading days to be precise.
Normally, this might not mean a whole lot. However, since Aug. 1, 2011, LIBOR (3-Month) has drifted lower on only one or two occasions. In fact, it journeyed from 0.255% on Aug. 1, 2011 all the way up to 0.582% by Jan. 5, 2012. As of Jan. 14, it has eased to 0.567%.
On its face, 0.582% and 0.567% may not seem like high annualized rates for a 3-month period. However, LIBOR is typically a few tenths of a percentage point more than the Fed Funds overnight rate, currently at 0.00%-0.25%. It follows that anything above 0.45% represents something ominously familiar to the 2008 toxic mortgage credit crunch and subsequent market collapse.
I documented and discussed LIBOR trends throughout 2011. For example, in September's
Currency ETFs Forecast More Trouble In The Works
, I wrote, "3-Month LIBOR rates climbed above a long-term moving average in mid-August ... and they just keep climbing. In fact, it is 40% more expensive for European banks to borrow from one another than it was on the 4th of July." (Note: At 0.582% in the first week of January 2012, it hit 128% more expensive!)