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Bank-to-bank loan rates rise in Britain

September 05, 2007|From Times Wire Services

Britain's interbank interest rate rose to its highest level in more than seven years as banks increased their reluctance to lend money to rivals until the extent of British banks' exposure to the U.S. mortgage market was better known.

The jump in key three-month interbank lending rates puts the Bank of England under pressure to tackle the growing crisis. Unlike its counterparts in Europe, Asia and the United States, the British central bank has so far rejected calls to inject cash into markets.

The three-month interbank rate, or LIBOR, now sits at 6.8%, more than a percentage point above the 5.75% base rate in Britain and above the central bank's emergency lending rate of 6.75%, indicating that confidence is very low.

The last time LIBOR was at such high levels was for a very brief period in June 2000. Its last sustained period at such a high level was after the collapse of the U.S. hedge fund Long Term Capital Management in 1998.

The current rate reflects banks' reluctance to lend funds to rivals at anything but a premium until they know the extent of the mortgage crisis.

Companies in both Britain and the United States use LIBOR to hedge currency exposure or change financing through interest swaps, leading to concerns about what happens when existing arrangements hit maturity.

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