In my recent post on
THE swap, I mentioned the underlying loan (with a notional of 195 million CHF). The interest rate the city had to pay for this loan, was the Swiss Franc 6month Libor plus a margin of 4.9 basis points (i.e., 0.049 percent).
Thinking of today's interest rate levels, this seems to be a quite attractive funding rate. Was this also the case in 2007?
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| Historical rates of CHF Libor6m. Images source:Teletrader. We can clerly observe the breakrdown of Lehman Brothers in autumn 2008. |
We observe that in 2007/2008 the 6m Libor rate for the Swiss franc was around 3 percent, and I observe that I am quite good in forgetting historical economic conditions. (I had assumed that Swiss interest rates to be lower between 2005 and 2008.)
Nevertheless, compare it to the 6m Euribor:
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| Euribor6m (red) vs. CHF Libor6m (blue). Data Source: Federal Reserve Bank of St.Louis |
What surprised me even more, was the Swiss interest levels in the early 1990s.
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| In the early 1990s: Also in Switzerland, Libor rates close to 10 percent. Image Source: homefinance.nl |
In order to finish the underlying loan discussion: It was equipped with an early exercise option for the loan creditor: When the creditor thought that margins (the 4.9 basis points mentioned above) were not attractive any more, they had the right to call back the 195 mio CHF (or alternatively, renegotiate the margins.) This (increasing the margins to be paid) happened in April 2013.
