Libor Cessation and Its Impact on Financial System.

Monday June 5th 2023 Monaco 64 home of alternative economics and contrain Views we're going to go over Libor today Libor is supposed to be phased out at the end of June and why do I say supposed to well because it was supposed to be phased out at the end of 2021 and it wasn't and I think it could cause a lot of trouble in the financial

markets and we're starting to see that of course in the banking sector in the US and it could very easily spill over uh into the UK into Europe into many other places before we go into uh what's going on right now a little bit about Libor and the basics uh what Libor really means well Library means first of all London interbank offered rates there's also a

uh overnight uh money and he'll quote a bid in an offer the bid will be where uh he'll borrow at from you and the offer is where you can uh borrow from him or he will lend to you so that's all it is and and this lending is just uh not not collect collateralized it's not like a repo where you sell sell them um a treasury

security and then buy it back the next day um add a little difference this is just uh uncollateralized unback Lending and uh this library is usually just above the FED funds rate or the bank of England base rate or the ECB uh base rate the EC when the Euro was created they created something called eurobor but there used to be the Euro Mark uh there used

to be a Euro French franc euro Lira and they were all uh Libor rates and uh I also recommend you go into my derivatives file because that's very important derivatives are a huge uh Market of course they're basically used to hedge underlying Securities but they've become like a casino because speculators hedge funds and even Banks they use use it to speculate not just to hedge and

it's usually usually very leveraged and it's off balance sheet and uh let's say you want to bet on a million dollars you only have to put like 50 000 down that's how the derivatives work and usually there's a margin account if your position goes against you the bank your counterparty asks for for margin and derivatives we don't even know how much there are out there uh

notionally some people say it's 600 trillion others say it's over a quadrillion which is a thousand three trillion I I think the latter is uh more correct the bis after the 08 crisis they changed the accounting for uh derivatives to make it look smaller and what's Libor got to do with derivatives well a lot of derivatives contract especially in interest rates derivatives what you call interest

rate swaps and they are the biggest kind of derivatives I think they're probably more than two-thirds of all notional derivatives uh when uh people deal in them and they deal mostly over the counter not in an exchange so regular laters have no idea what's going on in these markets well they reference Libor a lot of times Libor is used to um do deals in derivatives they

will usually say well I can swap this uh bond for you this fixed bond for six months you know and we're gonna charge you Libor plus 50 basis points so Libor is like a reference rate for a lot of derivatives and it's also a reference rate for a lot of loans not not just in London but throughout the world and especially in the United States like

Consumer loans mortgages commercial real estate so it's basically asking the bankers to change from driving on the wrong side like we do here in the UK some some of the American viewers say oh you were driving on the wrong side while we drive on the left side you drive on the right side for us you drive on the wrong side but it doesn't matter so it's

like asking the bankers to change the site they drive on or going to you in the states and say oh you got to start driving on the left side it would cause a lot of trouble unless you you did it over a long time you phased it out and that's all Libor uh the library transition means in my opinion uh you might want to comment down

in the comment section you might know more than I do uh yes the fed the bank of England and others have tried to uh go into other kinds of reference rates software in the US Sonia in the UK for Sterling but it's been a tough transition because people get used to driving on the right or on the left and they don't want to change and that's

what it's been all about I would say so we'll have to see if there will be an accident and it looks like a a lot of loans are still based on Libor according to uh Ernst young here it says this is from uh February 2023 Libor transition Where Do We Stand ahead of the ultimate cessation date uh in June 2023 so if you scroll down this

article it says that U.S dollar Libor cessation says 14 of lenders answered that most loans will fall fall back after your US dollar Libor cessation raising the potential possibility of a Redemption traffic jam in the final months prior to Libor cessation and it's interesting because uh the present governor of the bank of England Andrew Bailey he he was head of the uh SCC equivalent in the

UK called FCA and when he was head of the FCA he traveled to New York to speak to uh sifma uh which is the Securities industry and financial markets Association and to warn about preparing for the end of Libor so you can see here I'm gonna put this article Below in the description and he explains how Libor the reference rate is used for many loans mortgages

in the U.S and that's why I'm thinking uh with what's going on in the banks uh Regional smaller Banks and even the too big to fail and the fact that they're uh trying to get rid of a lot of uh performing commercial real estate loans before the end of June that's the excuse they give is that they want to cut off their losses but could it

could be related to to Libor and that's what we need to uh keep an eye on because a lot of derivatives as well we don't know if it's 200 trillion or a quadrillion or 600 trillion will be affected by this uh phase out of Libor and uh yes what else could hurt the financial markets stability uh vis-a-vis Libor well volatility liquidity and we've heard that the

U.S treasury market which is supposed to be the risk-free market in the world the safest Market has had problems with liquidity and I think it a lot of it has to do with this Libor situation and why have they decided to face phase out Libor well because back during the OA crisis Libor rates went through the roof they went way above the FED funds rate uh

that happened when all the banks were collapsing when Lehman collapsed and I remember sitting at my dealing desk in the city and we were all saying who's going to be next Morgan Stanley Goldman Sachs JP and Jake and we said JP Morgan is going to be the last and so LIBOR rate Spike because Banks uh JP Morgan wasn't uh comfortable Landing uh even overnight to Morgan

Stanley and and so on so Libor rates a spite but that that created problems for the whole derivatives market for the whole uh system it accentuated it's like snowballed all the problems so years later it came out that um the bank of England who's supposed to regulate the banking sector in London supposedly uh told uh Banks like Barclays to basically lie about the raid to tell

their dealers to say that Libor was two or one percent even though they didn't want to lend to the banks at 211 percent and uh of course they they've said that they never told them to do that but the way they spoke about it it was like a nudge and there's even an article which I've covered in my videos about library and I'll come to that

in a minute uh this is an article from 2017 from the garden and it says BBC to air recording that implicates bank of England in Libor scandal Panorama says it has recording of a 2008 call in which Barclays Bankers discuss alleged pressure by Bank of England to lower rates so there you go um of course the bank of England didn't get in trouble uh Barclays didn't

get in trouble they all covered for themselves I think it's the old um the old uh quote or adage from uh the former European commission president I even forgot his name now that's how uh charismatic he was but he said when things get really bad you have to lie so that's so Libor got tainted but the bank Bankers continued to use it and that's why they

wanted to phase it out so uh before we go to look at the markets just wanted to uh let you know the videos I did about Libor well I I did one in 2017 in April um Bank of England implicated in Libor rigging says BBC so I covered that uh April 2018 Library ois spread and the derivatives time bomb uh 2018 uh in May early market

update in the look at Libor and the Petro U1 I was talking about a petrol you won back then in 2018. uh 2020 February just before the everything kicked off and of course the 2020 crisis was a good excuse to extend the date of uh end of 2021 of course will there be another excuse in the coming weeks we'll have to wait and see I said

Libor risks disrupting 400 trillion derivatives and Loan markets and I was being conservative of course with that number and then on October 2020 Libor and the 80 trillion uh software big bank so there you go with Rising inflation Bang failures and massive layoffs across multiple sectors the future of the economy remains uncertain it's no wonder the central banks have been getting prepared by stockpiling gold at

itm trading we have spent over 27 years building a team of seasoned researchers and analysts who can help you prepare for any financial crisis our experts are ready to provide you with proven strategies to safeguard your wealth and Assets in the event of an economic downturn or Currency Reset which is frankly inevitable don't wait until it's too late schedule your free gold and silver strategy call

by clicking on the link in the description below so it's uh 8 44 a.m London time let's see where the markets are we got spot gold down uh about eight dollars we're trading at 1940 so Gold's still under pressure the spot or the uh the Banker's price I would say uh the Heisman 1953 and we're right near the low here uh Silver's down 20 cents at

23.40 on the lows the high has been 66. uh Dow futures up 41. NASDAQ is down 16. s p is unchanged Sterling is down half a percent 123.97 uh the Euros down uh just under 0.2 at 106.92 and the dollar is up above uh 140 versus the Yen now it's up a third of a percent and uh the dollar is uh up slightly versus the U1

at 7 12 94. Aussie dollar is down point two uh just below 66. and the dollar is unchanged versus the Canadian dollar 134.30 the Kiwi dollar is down 0.2 at 60 48 to the general Commodities uh we've got WTI Crude up two percent uh over a dollar almost a dollar and a half higher I see OPEC wants to cut production by another million barrels so we're

at 73.15. uh Brent crude is uh up just under two percent at 77.50 Platinum is uh up a dollar and a thousand and seven high grade copper is down a quarter of a percent at 372.50 and we'll quickly check the bond markets before we uh tune off the two-year deal yield is up uh 10 basis points at 446. the 10-year is up eight at 424 and

the 30 years up 10 at 4.57 so the UK Government Bond Market is not out of the woods the higher the yields go uh the worse it is for everything to do it Finance of course and mortgages credit cards because it will be reflected in higher rates uh U.S treasury market we got the two-year up six and a half basis points at 456. the 10-year is

up uh five at 375 so why are the bond markets coming off and yields going up well we had a strong non-farm payroll on Friday a U.S jobs data even though the unemployment rate Rose and people think that the FED might still be raising rates uh on June 14th they think the FED will have to stay fairly hawkish because supposedly the economy is doing great you

know and uh these non-farm payroll numbers are showing it even though non-farm payroll is just a a survey uh it they don't really account how many people are working it's just a survey a national survey and there's another survey the household survey which basically said that 300 000 jobs were lost and that's why the unemployment rate went up so it's all very confusing uh it just

adds to more and more on certainty and adding to that we've got the Libor of course phase out that's supposed to happen by June 30th so with that I'm going to wish you all a very good day and a very good start to your week take care bye