Credit Market Freeze Hitting Healthy Businesses

New York, NY, Oct. 1, 2008--Stocks are rebounding and a new bailout package could be coming soon, but the credit markets -- where day-to-day borrowing occurs to keep the gears of the economy turning -- are still stuck.

Even relatively healthy businesses are being left out in the cold.

Randall Stephenson, the CEO of AT&T Inc., said Tuesday that when the telecommunications company tried to get short-term cash last week by selling corporate debt known as commercial paper, no one was willing to lend anything for longer than overnight. An AT&T spokesman said later that as of Tuesday the company has ready access to the commercial paper market.

The crunch is being felt by others, too. Many small businesses can't get funding for supplies and in some cases are falling behind on their payrolls, said John Castellani, president of Business Roundtable, an association of CEOs of companies that employ more than 10 million people.

Castellani said the credit problems have been going on for several months but have accelerated in recent weeks as lending tightens further and consumer spending wanes.

The key bank-to-bank lending rate, the London Interbank Offered Rate, or LIBOR, rose to 4.05 percent Tuesday from 3.88 percent for 3-month dollar loans, and to 6.88 percent from 2.57 percent for overnight dollar loans -- the highest level since the British Bankers Association began tracking that rate in 2001.

That's especially worrisome because normally, overnight LIBOR is just slightly above the Federal Reserve's target fed funds rates, another overnight interbank lending rate. Now, it is more than 4 percentage points above the target rate of 2 percent. That has troubling implications for other lending rates tied to LIBOR, including homeowners' adjustable rate mortgages.