Libor discrepancies persist despite official guarantees

By Jamie McGeever and Kirsten Donovan

LONDON (Reuters) - Worldwide banking sector bailouts have yet to level the playing field when it comes to seeking funds and persistent discrimination is keeping interbank borrowing costs elevated.

The various guarantees to the banking sector from governments around the world have boosted confidence and helped to lower money market rates significantly over the last two weeks, at least for borrowing over shorter periods.

But banks whose balance sheets have withstood the crisis independently continue to raise funds more cheaply, while the penalty payable by those wanting to making use of the extensive government guarantees could make it uneconomical to do so.

Traders say banks are only cautiously starting to lend money again and only to names that have always been perceived as "higher quality".

"While the guarantee reduces the perceived risk of interbank lending and should therefore make it cheaper, a significant fee would tend to act in the opposite direction, adding to borrowing costs," Goldman Sachs analyst Ben Broadbent wrote in a note this week.

While government guarantees differ and have varying strings attached, an example of how this might pan out is the UK scheme.

The British government earlier this month pumped 37 billion pounds of capital into banks and guaranteed up to 250 billion pounds of new bank liabilities.

Banks wanting to issue debt utilising the government guarantee must pay a fee which has been set at 50 basis points plus the bank's median credit default swap spread -- effectively the cost of insuring against its default -- over the past year.