LIBOR Says It Isn’t Over

Rob Mackrill - Fri 16 May, 2008

LIBOR is going up again which means mortgages will too.

The worst of the credit crunch is over isn’t it?

Well, we start to wonder when we spy LIBOR going up again. LIBOR is the gauge by which banks lend to one another and the benchmark to which many loans are linked. The higher it is the more banks have to pay for their cash, which filters down to the more the rest of us in higher credit costs.

The rate has increased 0.08% in the past two days and is now 5.84% against a base rate of 5%. Clearly, after recent weeks of easing this is moving the wrong way again. It suggests credit worries in financial markets aren’t subsiding. They’re increasing. And if they’re increasing so are mortgage rates Darren Cook of Moneyfacts, tells The Times:

“ We’ll see a bit of a lag and then fixed-rate mortgage rates are going to go up again.”

Not great news for a sagging UK housing market and an army of insecure estate agents. The Times reports Humberts, a publicly listed estate agent with 80 offices, has had its share trading suspended following “doubts over its viability”.

But how come LIBOR is going back up again? Well, the latest Bank of England inflation report didn’t help. The ‘flation problem means interest rates won’t be coming down much from here, if at all, in the foreseeable. The Bank of England amongst others is pausing and it could be a permanent pause depending on how much charge is left in the commodity bull.

The Bank of England promised a £50bn swapsy with the banks three weeks ago to help unfreeze their balance sheets. Acting as some kind of high end intangibles only pawnbroker, the initiative means banks can dump their asset-backed securities with Threadneedle St and get government treasury bills in exchange. Perhaps it wasn’t enough. The FT reports the banks eying near double that sum in mortgage swaps - £90bn.

The banks are talking to the credit rating agencies – those disher outers of AAA credit ratings on suspect packages of mortgage debt – about how to “structure deals that will receive the AAA rating”. Mmm...makes you wonder. Wasn’t this the dealing betwixt bank and credit rating agency that got us into trouble in the first place? We’ll see, but when the commercial banks hold the loaded LIBOR gun against the head of the central bankers they are wont to cooperate.

Especially, given the wider world, in the words of the UN, is “teetering on the brink” of a severe downturn and needs its banks. In a mid-year update grandly titled The UN World Economic Situation and Prospects 2008 it said it expected world growth to come in at a pedestrian 1.8% this year way short of global inflation at 3.7%. As well as sluggish developed world performance it expects the developing economies to suffer too. Growth will come down from a heady 7.3% in 2007 to 5% this year and 4.8% next. If the forecast proves at least partially accurate where does this leave the commodity bull? Deflated we would expect.

Meantime, something we’re starting to notice on the oil patch is that we’re reading about new discoveries. Brazil has made two potentially very big offshore finds recently and today, a newswire report says UK-listed Tullow Oil has announced a discovery in Uganda that could turn the Butiaba region near the Uganda-Congo border into a major “petroleum province”. How much there might be it doesn’t say but with exploration motivated by a $124 oil price, perhaps this is the start of a new trend.

*** A friend advises that a senior actuarial position at a leading life assurance company now comes with a stakeholder style pension scheme. That is to say it does not come with one of those old-style pension schemes where the employer took care of you and “guaranteed” a pension based on how many years you sacrificed to their cause.

The rapid demise of the old style company final salary pension schemes are well documented – regulation, bear markets, tax raids and increasing life expectancy have all increased costs. The last point is the one causing new upset and threatening the dwindling number of schemes still open. Most schemes work out how much money they need in the pension pot based on male workers living to on average 85-86. Not enough says the regulator. Funding should be based on an average life expectancy of 89. That makes it a fair bit more expensive (again) for companies shouldering the liability of providing for retired employees. Each extra year adds about 4% to the cost of provision reports the Guardian.

It looks like yet another nail in the coffin of final-salary pension provision. There’s more on this subject from the architect of the much-copied Chilean model for pension provision, in Bill’s notes below.

Finally, this is yours truly signing off. As of Monday the Fleet Street Daily continues where the Daily Reckoning left off. Adieu.

Regards,

Rob Mackrill
The Daily Reckoning