Dollar Lending Rates Rise
Dollar lending rates rose on the interbank forex market despite the announcement of plans for the US government to bailout the failing Citigroup bank. The LIBOR (London Interbank Offered Rate) rate for three month loans in dollars rose slightly from 2.16% Friday to 2.17 on Monday, Nov, 24th, 2008.
Increase in LIBOR Rate
The increase in the LIBOR rate is important for the interbank forex, the financial sector, and the wider economy. The LIBOR determines rates for loans to households, and businesses. Many mortgages and student loans are tied to the LIBOR rate and can have wide ranging effects on the day to day economy. The rate increase suggests that banks are worried that other financial institutions could collapse in a chaotic global economy.
Credit Markets Frozen Despite Citigroup Bailout
Despite the US government’s agreement to inject $20 billion dollars into Citigroup and take on hundreds of billions in toxic assets credit markets remain all but frozen. While the move to rescue Citigroup boosted stock markets it did little to thaw credit markets in Europe and the US.
Euribor Rates Decrease
European Interbank Offered Rate or Euribor managed to decrease from 4.02% Friday to 3.97% on Monday. Both US and European rates remain well above the benchmarks set by central banks, 1% in the US and 3.25% in the Eurozone.
Citigroup to Give Government 8% Return
In exchange for the government’s $20 billion dollar injection Citigroup will offer an 8% dividend on preferred stock. In addition Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC’s mortgage modification program. Citigroup lost 60% of its value last week as investors worried that toxic debt would turn into losses for the beleaguered bank.
Partial Nationalization
Citigroup is a major player in the interbank forex market and the failure of Citigroup would be catastrophic for markets in the US and abroad. Citigroup now joins other banks that have been essentially partially nationalized, a move that a year ago would have been unthinkable. It is hoped that the move by the US government will bring stability to Interbank Forex markets and provide investors with Forex opportunities.
Quick Forex Tip: Interbank fx trading determines pricing in all levels of currency markets. Spreads available to interbank traders are sharp and unavailable to outsiders. Interbank traders who can guarantee a large number of transactions for large amounts can demand a smaller spread between the bid and ask price. Unfortunately these same spreads are not available to the average investor making relatively small transactions. Thus, for the average investor to participate in interbank fx trading, s/he must do so through the use of a broker.
