Money Markets Show Credit Crunch is Worsening

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


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 . . . 


Libor Signals Tighter Credit as Banks Balk at Lending
Liz Capo McCormick and Gavin Finch
Bloomberg, Aug. 25, 2008

Recession fear for half the globe, says Goldman Sachs
Chris IrvineLast
Telegraph,  12:02am 22/08/2008

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What's been said:

Discussions found on the web:
  1. Jeff M. commented on Aug 25

    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.

  2. Thomas commented on Aug 25

    What moron ever bought off on the idea that the rest of the global economy could somehow decouple from a massive credit contraction in the US which just happens to issue the world’s reserve currency and buys the rest of the world’s export surpluses?

    Who exactly is going to buy these goods going forward and with what money?

    We are witnessing the global deflationary collapse that is the inevitable result of a fractional reserve banking system regulated by central bankers working at the behest of an international banking cartel.

  3. Bob_in_MA commented on Aug 25

    If we take Roubini’s posts and shift them 6-9 months, I wonder if they would show extreme correlation with Goldman Sachs later pronouncements?

  4. Frank commented on Aug 25

    Barry, perhaps you should run a contest to name popular theories that were later debunked by reality. I’ll start out with the first two:

    “In the New Economy, it’s eyeballs that count in lieu of profits…” circa 1999

    “In the New Era of global growth, emerging economies will decouple from the receding U.S. economy…” circa 2007

  5. Donkei commented on Aug 25

    It’d be hard to imagine that you could ever have Thomas Friedman’s flat earth of globalization simultaneously exist with a de-coupled world economy. One or the other is correct, but not both. In this small matter, I would have to take the side of Friedman.

    Isn’t the whole idea of globalization one of coupling, i.e., trading to exploit comparative advantage?

    China is just about due for a major contraction, perhaps a severe recession or depression, as incredibly fast growth (like the US in the 20’s) always creates incredibly large supply/demand imbalances. When it comes (China’s contraction), it will surely be blamed on weakness in the G-7 and how “coupled” is their export-driven economy to the ability of G-7 economies to buy the exports. That will be only part of the story, but certainly a large and relevant part.

  6. Bruce commented on Aug 25


    Your good friend and perpetual ostrich in the sand, Lawrence Yan, finally admits that even commercial real estate may get mauled in the next few months…I think he may be reading your blog….


    Keep up the good work and give us a place to check reality daily…

    Bruce in Tennessee

  7. Mike in NOLa commented on Aug 25

    Hussman this morning mentioned a potential addition to the VIX by combining it with spreads and calling it the “jaws of death signal.” A superficial look at the times it’s occurred looks interesting.

    Any thoughts? Is it any more meaningful than a simple plunge in the VIX?

    BTW, the VIX has really popped up this morning. Is this a real turn or just more volatility.

    Hey Jeff M:

    If you think you have it tough up there, you should be on the Gulf Coast where it’s only under 90 when it’s raining. And if you are lonely, the CNBC hosts are expressing a longing for Dennis and promise to let us hear from him :)

  8. Movie Guy commented on Aug 25

    You’re right. I need to stop reading Bloomberg on Mondays.

    What’s the best day to read it and not get sick?

  9. richard l commented on Aug 25

    can tell you how tired i am of logging on to ‘thebigpicture’ and seeing articles from bloomberg and wsj. what’s the point in that? you’re getting lazy barry.


    EDITOR: Cut the guys some slack — He’s on vacation.

  10. richard commented on Aug 25

    Well, if we’re going to copy other’s homework let’s at least make it good. From “Freddie Paper With Fed LeveragePosted by John Carney, Aug 25, 2008, 4:24pm

    Shares of Freddie Mac are soaring today, up more than 20 percent right now. The rise is being attributed to Freddie’s success in selling $1 billion of three-month and $1 billion six-month notes in a weekly auction, which has supposedly eased fears that the government sponsored mortgage company would have trouble financing its ongoing operations.

    But today’s debt sales may not be the endorsement of the financial health of Freddie Mac from bond investors that many believe it to be.

    The pricing on Freddie Mac’s three-month notes was about 90 basis points more than similar-maturity U.S. Treasuries. The spread on the six-month notes was about 92 basis points. Last week the spreads were 61 basis points on the three month notes and 80 basis points on the sixth month.
    The big boost of confidence in the shares, however, seems to have come from the fact that there were more bidders this time around, or at least bidders seeking more of the Freddie notes. Of course, the higher pricing is attractive to some bidders. But there may be a more technical and less transparent reason for the increased demand.

    We don’t know who bought the Freddie notes today. But buyers of Freddie notes who have access to borrowing from the Federal Reserve would have found the decision to bid relatively easy. That’s because the ability to exchange the Freddie debt for Fed cash means banks can buy Freddie debt with a huge amount of leverage, dramatically increasing the return on their capital.

    Here’s how it works. A bank that bought the six month notes from Freddie this morning could also bid to borrow from the Fed’s Term Facility, which held an $75 billion auction today. As collateral for the borrowing, the bank could offer the newly purchased Freddie notes, for which the Fed would give them credit for 97% of their market value. Recently, the TAF pricing topped out at 2.35 percent for 28-day borrowing. So a bank buying $100 million of Freddie paper yielding 2.858% could flip it to the Fed, borrowing $97 million at around 2.4% (assuming the pricing will be slightly higher this time around).

    At the end of the day, a credit desk could buy $100 million of Freddie debt for just $3 million down. On that $3 million, the desk would receive a 17.7% annualized return, or 8.8% over six months, for paper that is explicitly backed by the Treasury Department. Not a bad deal at all. ”

  11. Pat G. commented on Aug 25

    “all but the safest government debt”

    Treasuries? Isn’t that an oxymoron? Oh, I forgot; our fiat currently is backing it.

  12. Tom commented on Aug 26

    Denial, recognition,fear….panic. We are leaving recognition and entering fear stage. Keep your powder dry for the panic stage.

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