Credit Re-Freeze Headed Off at the Pass

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May 12, 2009

We’ve talked about how a rising TED Spread and a rising Libor-OIS Spread were hints that the credit markets were starting to freeze up again without ever having fully unthawed. Well, the idea is back in focus again today, as a re-freeze was stopped just before it got started.

Here’s the deal - the rising TED Spread suggested the perceived risk in interbank lending was increasing, while the rising Libor-OIS spread hinted that funding for loans was more and more limited. Neither spread had reached ‘dire’ levels yet, but right now the economy can’t afford even the slightest mis-step.

Well, there’s good news on that front. Last week week - and so far this week - the TED Spread as well as the Libor-OIS Spread have started to fall again. It wasn’t the Geithner plan that prompted it, as the spreads started to fall before the plan was announced. However, it was likely to be Geithner’s plan that kept the overall de-thaw going before it fully reversed and clogged the credit market again.

Here’s the TED Spread chart….