The three month dollar Libor rate fell to 0.99% this morning, breaking, for the first time, below the 1% benchmark rate. Libor or London Interbank Offered Rate tracks the interest rate at which banks borrow unsecured funds from the money markets. Currently, it is estimated that roughly more than $350 trillion worth of loans worldwide are linked to the Libor rate.

The Libor rate saw a strong uptrend in the first phase of the credit crunch, as the uncertainty regarding the health of the financial system was reflected in the money market rates. The Libor rate peaked at 4.818% in November, but the decision taken by the Fed and the other central banks helped alleviate the inter-banking strains. In particular, the main factors that influenced the Libor rates were the Fed’s decision to offer dollar swaps with the other major central banks and pledge to sustain the balance sheets of any other falling banks, so the Lehman situation will not be repeated. Trade Team notes that the timing is even more interesting, since today the market expected the stress test results. “According to the latest rumors, ten out of the 19 banks tested will be asked to increase their capital base, something that should have had a negative effect on the market, but so far it has not”, Trade Team said.

Having the Libor rate drop to a record low level, more optimism is being injected into the equity markets. The main indexes from the U.S. and Europe erased the declines seen in the first two months of the year, helped by optimism that the global contraction is slowing down. The record low Libor rate should further strengthen the case, since it helps businesses and consumers’ access credit and liquidity with more ease, something that was not the case over the last year.