Wednesday, May 13, 2009

Dramatic Shrinkage of Credit Risk Fears

In another sign the worst is over for this part of the downturn, the gap between London interbank rates and overnight market rates – a pure measure of credit risk – has dropped sharply in recent weeks.

The spread has now narrowed to levels seen previously only before the September 2008 collapse of Lehman Brothers.

FT reports:

The overnight index swap spread fell to 68.5 basis points (bp) on Wednesday for lending in dollars over three months and 60.5bp for lending in euros. This measures the spread that three-month London Interbank Offered Rates, or Libor, trade above a three-month average of overnight market rates, which are considered risk-free.

These spreads stood at 86.3bp and 63.4bp respectively on Friday September 12 – the last fix before Lehman collapsed on the following Monday. These spreads peaked on October 10 at the height of fears of a financial meltdown. The dollar spread touched a record high of 364.5bp on that day, while the euro spread rose to 194.1bp.
We are now well on our way to "recovery". Of course, this recovery will bring with it huge inflation, but for now it will be a continuing booming stock market, and the signs of a turnaround in the real estate sector will become more obvious.

1 comment:

  1. Wasn't the "real" financial crisis actually over in just a couple of months, and what we have seen since then are just the re-inflation of Bubblonomics?

    This fake "boom" is at best stagflationary, although I am seriously beginning to wonder how many countries will hyperinflate. The policy of sucking out the last of the "real" reserves in the financial system keeps continuing, and soon there will only be paper money, with absolutely nothing backing it.

    But what do I know, maybe sprinkling fairy dust over the world economy will make everything work again.