Libor rates steady as spreads pressured by credit woes

By Kirsten Donovan

LONDON (Reuters) - London interbank offered rates (Libor) were relatively steady on Tuesday but spreads over secured lending rates remained pressured with markets fearful of more credit-crunch related bad news to come ahead of the end of the second quarter.

The interbank cost of borrowing three-month dollars, euros and sterling was flat to slightly lower, according to the British Bankers Association's latest daily fixing.

However, the premium paid for borrowing dollars and euros over anticipated central bank rates inched higher. Sterling spreads did contract modestly but only after notably widening on Monday when British lender Bradford & Bingley BB.L issued a stark warning on the state of the UK mortgage market.

Recent optimism that a global credit crisis was winding down took a severe blow on Monday when Standard & Poor's cut debt ratings of three U.S. brokers and No. 4 U.S. bank Wachovia Corp WB.N ousted its chief executive, while Bradford & Bingley issued its bleakest outlook yet .

That was plenty to rattle markets ahead of the end of June, which will see financial institutions seeking cash to square books at the end of the second quarter.

Traders and analysts said there was likely to be a choppy few weeks ahead, with the looming June 18 settlement and contract date on the International Money Market also likely to add to volatility.

"We believe IMM date problems are likely to undermine the current benign capital market conditions from about the end of May 2008 to the end of June," said UBS strategist Meyrick Chapman, repeating an earlier warning. "If so, we should expect falling rates, declines in equity markets, widening spreads and a rise in bad news from the financial sector."

Traders said interbank markets remained sticky, seeing little relief any time soon.