Tags: libor | Rate | Spike | Second | Credit | Crisis

Surging Bank Rate Stirs Fear of New Credit Meltdown

By Dan Weil   |   Wednesday, 02 Jun 2010 12:47 PM

The London interbank offered rate, or Libor, recently jumped to a 10-month high, and that has some investors worried that a second credit-market meltdown is coming.

The Libor is what banks charge each other for short-term loans. The rate recently increased 12 days in a row amid concern about Europe’s debt crisis.

"The direction is telling you where the economy is heading. It's very bad," says Michael Pento, chief market strategist at Delta Global Advisors.

"We didn't learn much from the 2008-2009 credit crisis,” he told CNBC.

One lesson is that there’s no decoupling between markets around the world in times of crisis, he says. People thought decoupling would occur then and were wrong.

"Today they are telling us the United States is immune from the sovereign credit crisis in Europe. They are completely wrong (again)," Pento said.

John Lekas, CEO of Leader Capital Group, says the Libor jump presages a double-dip recession that will send the Dow Jones Industrial Average as low as 5,000 by mid-2011.

"It really is the worst of both worlds," he told CNBC.

"Your cost of capital is going to get significantly higher, and what you charge for services is going to get significantly lower."

Nobel laureate economist Joseph Stiglitz is worried about the surge in Libor too.

“The credit markets’ reaction is sending a strong message that the banks don’t trust each other’s balance sheets,” he told the New York Times.

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The London interbank offered rate, or Libor, recently jumped to a 10-month high, and that has some investors worried that a second credit-market meltdown is coming. The Libor is what banks charge each other for short-term loans. The rate recently increased 12 days in a row...
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