Money Markets Show Credit Crunch is Worsening

Monday, August 25, 2008 | 09:15 AM

This morning's must read journalism is a Bloomberg piece on credit availability as projected/forecast by money markets and interest rate derivsatives.

Ubiq-cerpt:™

In a replay of the last four months of 2007, interest-rate derivatives imply that banks are becoming more hesitant to lend on speculation credit losses will increase as the global economic slowdown deepens. Binit Patel, an economist in London at Goldman Sachs Group Inc., said in an Aug. 21 report that nations accounting for half of the world's economy face a recession.

The premium banks charge for lending short-term cash may approach the record levels set last year, based on trading in the forward markets, where financial instruments are sold for future delivery. Back then, concern about the health of the banking system led investors to shun all but the safest government debt, sparking the biggest end-of-year rally for Treasuries since 2000. . . .

Banks are charging each other a premium of 77 basis points over what traders predict the Federal Reserve's daily effective federal funds rate will average over the next three months to lend cash. The spread is up from about 24 basis points in January, and may widen to 85 basis points, or 0.85 percentage point, by mid-December, prices in the forwards market show.

Former Fed Chairman Alan Greenspan said in June that this spread, which is the difference between the three-month London interbank offered rate for dollars and the overnight indexed swap rate, should serve as a measure for telling when markets have returned to normal.

The entire piece is worth a few moments of your time.  In a related analysis, Goldman Sachs economist in London -- mentioned on the above piece -- is forecasting a significant Global recession:

Half the world economy, including the UK, is in recession or on the brink, according to research from Goldman Sachs.

The investment bank has warned that the world's major economies, including the US, Japan, the eurozone and the UK, are "either in recession or face significant recession in the months ahead".

It also raised fears that the slump could have a profound knock-on effect for China, whose thirst for raw materials and consumer products has been propping up many economies.

Kinda makes all those decoupling theories look rather foolish . . . 


>

Sources:
Libor Signals Tighter Credit as Banks Balk at Lending
Liz Capo McCormick and Gavin Finch
Bloomberg, Aug. 25, 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aa9qsN2KBb0Y&

Recession fear for half the globe, says Goldman Sachs
Chris IrvineLast
Telegraph,  12:02am 22/08/2008    
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/22/cnrecession122.xml

Monday, August 25, 2008 | 09:15 AM | Permalink | Comments (13) | TrackBack (0)
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Comments

An an aside (sorry Barry, but I'm cranky on this crisp, gorgeous fall-esque Monday morning), my new policy in my home office during the weekdays is to mute the sound ever time Sir Goldilocks or Dennis Kneale comes on. Otherwise, the remote my find itself flying through the tv screen.

Posted by: Jeff M. | Aug 25, 2008 9:47:42 AM

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