There are some early signs of recovery in the credit markets. If the trend continues, that could be good news for borrowers.
We've written several times in recent months about Libor and Credit Default Swaps (CDSes). Two years ago, these were pretty arcane concepts that only credit market professionals knew about. Now your average taxi driver can probably give you an opinion on them both.
If you haven't been in a taxi recently, Libor measures how much banks are paying in interest when they borrow from each other.
CDSes measure how likely it is that a company might go bust. Or more accurately, the market's judgement on how likely it is that a company might go bust.
Good news
The good news is that there are some early signs of improvement in the credit markets. The bank bailouts, emergency cash injections from governments, and interest rate cuts by central banks are finally making an impact.
Three-month dollar Libor was at an eye-wateringly high 4.8% on October 10th. That was more than 3% higher than the Fed funds rate, a very high premium. By contrast, back in May 2007, the premium was only 0.36%!
But today three-month dollar Libor has fallen to 3.026%, a 2% premium to the Fed funds rate.
The change in three-month sterling Libor hasn't been as striking but is still encouraging. It's fallen from 6.28% on October 10 to 5.84% today.
Falling Libor is good news for many home-owning Fools, as Libor has a significant effect on mortgage rates in the UK. If Libor falls further, rates on variable mortgages may follow.
It also suggests that banks are becoming a little more willing to lend to each other. If banks lend to each other, they're more likely to lend to businesses and that could help us avoid a full-blown economic slump.
There's also been some encouraging movement in the CDS market recently. On 17 September, CDSes for HSBC (LSE: HSBC) were trading at 128.3 basis points. In other words, the market thought there was a 1.28% chance HSBC would default on its debts. Now the HSBC CDSes have fallen to 83.1 basis points. So there's now only a 0.83% chance.
Similarly, the CDSes for Royal Bank Of Scotland (LSE: RBS) have fallen from 304.89 basis points (2.05%) to 106 basis points (1.06%).
Back to normal?
Sadly, I'm not suggesting that things are back to normal. After all, dollar Libor's 2% premium to the Fed rate is not what you'd see in conventional times. And further bad news could push Libor back in the wrong direction.
Bad news
I'm afraid I've saved a piece of bad news for the end of the article. The rating agency, Standard & Poor's, has cut Argentina's debt ratings for the second time in three months.
There's a risk that Argentina will default on its loans and it's not the only country in that situation. Problems in emerging market economies appear to be the next stage in the credit crisis.
Hey ho...
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