Libor caps longest drop since Nov on bank gains

LONDON: The cost of borrowing in dollars in London fell for a 14th day, the longest stretch of declines since November, as improved earnings at banks signaled a thaw in the global credit freeze.

The London interbank offered rate, or Libor, for three-month loans in dollars fell half a basis point to 1.10% on Friday, the British Bankers��� Association said, down three basis points in the week. The Libor-OIS spread, a gauge of bank reluctance to lend, narrowed to within one basis point of the least since before the collapse of Lehman Brothers Holdings Inc.

���For the moment, the dynamic is for a downward move on Libor.��� Matteo Regesta, an interest-rate strategist at BNP Paribas said. ���The health of the banking sector is pivotal for that to happen.���

Citigroup Inc, the US bank that received $45 billion in government bailout funds, on Friday posted a $1.6 billion profit in the first quarter, ending a five-quarter losing streak. Goldman Sachs Group Inc, JPMorgan Chase & Co, Wells Fargo & Co reported earnings this week that beat analysts��� estimates.

Improved bank results are no ���one-off,��� Barclays Plc President Robert Diamond said in a Bloomberg Television interview on April 15.

The last time the three-month dollar Libor fell for so long, in the 14 days through November 12, central banks around the world were injecting unlimited funds into money markets in a concerted effort to revive lending. It���s now within 11 basis points of a record low of 1 percent, reached in June 2003.

The declines are ���reflecting a reduction in systemic risk,��� a team of analysts at Morgan Stanley in London led by Laurence Mutkin wrote in a research note to clients.

Libor, which determines borrowing costs on about $360 trillion of financial products around the world from home mortgages to corporate bonds, is set each day in a survey of banks conducted by the London-based BBA.

The Libor-OIS spread narrowed to 90 basis points, or 0.90 percentage point, from 93 at the end of last week. It was at 89 basis points on January 15, the lowest level since before Lehman went bankrupt.

Former Federal Reserve Chairman Alan Greenspan said the spread would have to drop to 25 basis points before markets could be considered ���normal.��� It averaged about 11 basis points in the 10 years before the credit squeeze began.