TED Brings Good News
There's finally good news for the credit crunch. The LIBOR is slightly above 1% and the TED spread actually hit 1% today, a milestone and an indication that banks are trusting each other once again. That's very good news for businesses and a sign that the credit freeze is thawing.
LIBOR, or the London Interbank Offered Rate, is the average three-month interest rate between banks in the London interbank market. The TED spread is a gap between two interest rates, which is used as a marker of the financial strength of banks. The TED, or Treasury Eurodollar, spread is calculated by subtracting the interest rate on treasury bills from the three-month dollar LIBOR.
CNNMoney reports this afternoon after the inauguration of Barack Obama:
"The so-called "TED" spread, a measure of banks' willingness to lend, narrowed to 1.00 percentage point from 1.04 percentage points Monday. The lower the TED spread, the more willing investors are to take risks. The rate surged as the credit crisis gripped the economy, but has since fallen off as central banks around the world have lowered interest rates and pumped the economy with liquidity.
On Monday, for example, the British Treasury announced a second bank rescue plan, aimed at easing credit and increasing lending.
In September and October banks were very wary and uncertain of the the solvency of other banks. As a consequence, they spiked their risk premium for interbank lending to a high. That resulted in a credit crunch, where loans to small businesses and franchise owners were extremely difficult to come by.
Banks are now lending at rates that are back to pre-September levels, probably buoyed up by trust that the governments of the U.S. and Britain will back up their banks.
Businesses continue to lose money. Unemployment continues to climb. The Dow took a major tumble today. Bank shares took a dive. An Associated Press article explained, "The market's faith in the outgoing Bush administration's $700 billion bailout effort was already waning, with critics in Congress and on Wall Street saying there was little to show so far despite the massive outlays of taxpayer money."
But for the credit crunch, this is subtle but it is good news.
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Related reading:
When Banks Find it Hard to Borrow, so do the Rest of us, The Economist, Oct 2, 2008
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