the markets are trying to re-price structural changes to the ban

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Market Seems To Like Down More than UpData Points: Energy & MetalsMay 27, 2010, 4:07 PM ET.Are Libor Fears Overdone?
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UBS Investment Research
U.S. Dollar Three-Month Libor/OIS Spread, considered a gauge of stress in the credit markets. Put simply, the higher, the more stressed. So, it looks like we finished up a pretty nice day in the stock market.

Still, we’re sticking with our thesis that the key to the direction of the market is the London interbank offered rate, or Libor, which is the rate banks charge to borrow from eachother. Over the last couple days Libor has continued its move higher, although its moves up have tapered off a lot almost to the point of flattening. That seems to be encouraging a bit more risk-taking, as it lessens the fear about problems with the global financial plumbing system.

“Cut to the chase,” investors say. “If Libor is the key, where is it going.” According to a couple thoughtful notes we’ve come across, the likely direction is up. But that doesn’t mean we’re set for a repeat of 2008.

In a note published Thursday, UBS analysts wrote:

Interbank spreads are, in our view, likely to rise further in the near term. The removal of implicit government support by Congress under the U.S. financial regulatory reforms would be likely to lead to downgrades of banks by credit rating agencies, further pushing up borrowing costs.

However, we do not expect to see a repeat of the post-Lehman collapse in liquidity that made the funding market for banks almost dysfunctional given the funding support that is currently available from central banks, and the improved capital position of the banking sector, notably in the U.S.

Contrary to early discussions on exit strategies and the withdrawal of government support among policymakers, the European Central Bank has continued to inject over