Credit markets seize – even for AA companies

Business globally is seizing and failing through lack of credit.

Even firms with an excellent record and AA ratings cannot get credit except on overnight terms.

Several markets that are still functioning, are doing so at record prices.

The graph on credit risk reveals a remarkable exponential vertical rise never previously seen in credit markets.

The problem begins with the reluctance of banks to lend to each other. They are piling money into central bank deposits or into treasuries.

The rate at which they lend to each other is the Libor (shorthand for London interbank offered rate). The libor is the premium over bank rate in the UK, or treasuries in the US. It climbed to a record 4.21% today.

There is a confidence problem. Banks are reluctant to lend to each other for two reasons: first they are unsure that other banks are creditworthy as no-one knows what liabilities may result from derivative exposures.
(Warren Buffet rightly called derivatives” weapons of mass destruction”).

Banks also want to retain a maximum of money.

According to Bloomberg, US commercial paper has tumbled in the worst month for corporate credit on record. Even the safest company bonds plunged in the worst losses in decades.

Investors are selling commercial paper and buying treasuries. Credit market and credit windows have closed even though the Federal Reserve has pumped in $1 trillion.

In the US, the two year swap spread, the spread between the rate on a two-year interest-rate swap and treasury yields surged to 166.25 basis points: the most since Bloomberg first compiled data in 1988.

See also: Groundhog day on the trading floor
              Reserve Bank sees lower surplus 
               Commodities dive

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