Summary
Heavy dollar funding needs also spilled over into the settings for sterling LIBOR and Euribor, as banks unable to raise sufficient dollar funds directly turned instead to these (smaller) markets, borrowing in pounds and euros and swapping the proceeds into dollars.
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Why Are Libor Rates Still so High?
Despite multiple rounds of liquidity injections by global central banks, with increasingly long maturities and against an increasingly broad range of collateral, interbank rates in the main industrialised economies remain surprisingly high. As of June 18, the spread between US 3-month LIBOR and the Fed Funds rate was around 80bp, while the equivalent spreads in the UK and the Eurozone were around 95bp. In all cases, these spreads were close to the highs seen last September and December, and imply a very tight liquidity situation indeed. Moreover, it appears that markets expect LIBOR spreads to remain at unusually high levels for some time. Based on derivatives prices, the market expectation is that UK spreads will still be around 40bp early next year (compared to the normal 12-15bp) while based on spot LIBOR rates, spreads are seen...
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