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Credit markets tightening up again

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Kai Ryssdal: The possibility of banks failing, or at least defaulting on their loans, is sending ripples through the credit markets. Again. If you’re thinking right about here that this is where the banking crisis started, with phrases like LIBOR coming into more common usage, join the club. Because the cost of lending between banks is rising. Again. After brief dips back to something close to normal a couple of months ago, LIBOR, that is, the London Interbank Offered Rate, has been creeping up. Marketplace’s Jeremy Hobson reports from New York that the one part of this financial crisis that seemed to be getting better, now appears to be getting worse.

JEREMY HOBSON: If LIBOR’s not part of your daily vocabulary, you may have heard about it last fall — when it skyrocketed to more than 4 percent during the scariest days of the financial crisis. Four percent LIBOR translates to frozen credit markets. It’s nowhere near that now — just 1.3 percent — and the upward movement is different.

GUY LEBAS: It seems more of a fundamentally driven than sort of a panic driven state of flux.

Guy Lebas is chief fixed income strategist with Janney Montgomery Scott.

LEBAS: It’s not anything acute or fear of maybe companies en masse falling apart in a very short period of time. It’s just the fact that corporations have gotten less credit worthy as a result of economic problems.

Professor Douglas Diamond at the University of Chicago’s Booth School of Business says the timing of LIBOR’s rise tells its own story. It started in January, when investors began to worry that they had placed too much hope in a quick economic fix from the Obama Administration.

DOUGLAS DIAMOND: They’re either concerned that they’re not as good at working out a plan as they thought, or alternatively when they looked into the banks, they found something a little uglier than they expected to see and they’re having a harder time fixing the worst problem. And nobody knows which one it is.

But Diamond says everyone’s watching Washington for a solution. And not just big investors and corporations. Your adjustable-rate mortgage may be tied to LIBOR. And the credit markets are often seen as leading the stock market. Trouble there can spread, as we now know all too well.

In New York, I’m Jeremy Hobson for Marketplace.

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