Could you have a negative LIBOR?

[arabianights]

Conceptually, would it be possible to have a negative LIBOR?

I think a negative LIBID ought to be possible...

 

[Rhody Trader]

I'm going to say no on this one. We've seen T-Bills have negative yields (if only just and briefly), but that's seen as the ultimate in a riskfree place for one's cash. LIBOR, though, is unsecured lending. What lendor in the world is going to accept a negative interest rate for that when they could just put their cash in Bills?

 

[A Dashing Blade]

No this end as well.

 

[andanotherthing]

Story from bberg 4nov 1998 ........

Barclays Offers Negative Rates for Yen Libor

" Tokyo, Nov 4 (Bloomberg) -- Barclays Plc Britains third largest bank, provided negative rates of interest for the calculation of London interbank offered rates on yen lending according to data provided by the British Bankers Association......"

 

[arabianights]

Well I've decided you can have negative LIBOR in theory - after all if you can borrow at -0.5% why not lend at -0.25%?

Have got on to LIFFE about changing Euroswiss price limits.

 

[Rhody Trader]

Well I've decided you can have negative LIBOR in theory - after all if you can borrow at -0.5% why not lend at -0.25%?

Well, in theory anything is possible. So long, however, as LIBOR isn't the risk-free option then it's really, really hard to see someone paying to lend unsecured to a bank or institution. Maybe if the risk-free rate went negative (by a healthy amount) that would happen.

 

[arabianights]

I've been doing some more research on this, and turns out the Swiss were offering negative interest rates in the 70s to foreigners to discourage them from holding Swiss francs.

The SNB is very concerned about the strength of the franc given how many stupid franc denominated loans banks have made to eastern european types... they were pretty silly in the first place but with such a strong franc they are crazily difficult to pay back.

So something interesting could happen. In such a case of course the SNB could also decide to stop targeting LIBOR as well... all kinds of weirdness lies ahead.

 

[arabianights]

Here is a good link

 

[arabianights]

Another handy one.

I really think we might have negative interest rates. Certainly we should all be bearing them in mind as a possibility now.

 

[Rhody Trader]

We've already seen them. T-Bill yields have already gone briefly negative a couple of times. But that speaks to my point about the risk-free security.

 

[arabianights]

I mean proper negative interest rates in the sense of base rate being negative.

 

[Hotch]

Well, I'm pretty sure it is possible, but it's a situation you don't really want to think about.

Take a step back and look at it simply;

If you're having negative interest rates, the lender is paying the borrower to look after the lender's money. So if the lender thinks the borrower is less risky then keeping the money, then sure.

 

[Rhody Trader]

I mean proper negative interest rates in the sense of base rate being negative.

You're original question was about LIBOR, not base rate, but to carry on, it would take some pretty extreme circumstances to see a negative base rate. I don't think you could ever see it in a situation like the Fed setting it's target rate to -25 bps at a normal meeting. It would have to be situation where a currency were getting crazy strong.

 

[arabianights]

BBC NEWS | Programmes | Moneybox | Could interest rates go negative?

 

[tripleogstar]

I am sorry but it is ridiculous to even think that the base rate in the U.S or Europe could go negative. In that case, banks could borrow from the central bank and pay back less than they borrowed. The central bank would risk going bust!

 

[MrGecko]

what if you see deflation of, say, 5% - then a negative base rate 25bp could still be a +ve real rate...???

 

[arabianights]

That's my point, it can be a +ve real rate

Just one scenario... say Switzerland introduced a substantial enough tax to the banks on the money they were holding above Basel requriements + x %... then it makes sense to lend the stuff out at negative rates.

 

[tripleogstar]

I personally dont think deflation will be anywhere close to as bad as everyone predicting, and definitely not 5%.

 

[arabianights]

From Monday CME will be allowing ED calls with a strike of 101

 

[Directional]

wow, thats interesting!