Saturday, May 2, 2009

3 mth libor rate now 1.01% (20 yr low)

I can only find a chart that goes back 20 years - I wouldn't be surprised if the 1.01% is an all time low.

The 3 month libor had increased to 4.8% back in October (the height of this credit crisis). The 3 month libor is recognized (globally) as the benchmark lending rate. It provides an indication of lending between banks. A high rate means lending between banks is less, and a low rate is the opposite.

Right now, a 1.01% rate means there is heavy lending between banks. The problems (during the credit crisis period) have been related to banks not lending sufficiently to consumers, although other indicators might be suggesting that that has increased slightly.

This low rate is a direct result of all of the trillions of dollars that have been pumped into the banking systems by governments around the world, in their attempts to avoid a 1930s type depression - more quantitative easing still to come. This is an unprecedented flood of money. IMO, it is an early indication of money supply now embedded into the system, just waiting to explode into inflation once the global economy gets reflated in the next couple of years.

With all that fiat money overflowing the system, I can picture the 3 month libor rate being extremely low for a long time into the future. I wouldn't be surprised if the rate falls below 1%. To be honest, if there is another round of major quantitative easing by the governments then I wouldn't rule out .5%.

Interest rates for a lot of loans are calculated based on libor (a floating rate) + a certain fixed percent (i.e. 4%). Some deals are based on a straight (fixed) rate to ensure certainty over an extended period of time.

Based on the March 24th NR, the deal with our $65M US potential lenders is for 8% (year 1) and 6% for each subsequent year. I'm getting the impression that our potential lenders are smart business people. I think they are seeing the scenario I just described above, where libor is almost nothing and will likely not go much higher for a long time into the future (due to the massive injection of stimulus money by governments). It will likely be hard to get an extremely high return on invested money for a while into the future (especially as lending really picks up). By signing up to a fixed interest rate deal with Century, it allows them to get a semi-decent yearly return, but more importantly it allows them rate certainly in an industry (gold) expected to perform well over the next 7 years.

I wouldn't be surprised if our potential $65M lenders want this deal to be fully closed off as quickly as we do.

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