Sean Mc

LIBOR Shows Worst Is Yet to Come for Credit Markets

I agree with the comments above saying this was a good tutorial. However, I disagree with the prognostication for the credit markets. Central banks and government agencies, including the FDIC in the U.S., have now guaranteed all interbank loans, so there is really no risk of default. There is a 75 basis point fee for commercial banks that want the guarantee, so it is an arbitrage play for banks to borrow from the Fed at all-time low rates and lend to other banks at large spreads without risk. Furthermore, central banks are injecting equity directly into commercial banks, deleveraging them and providing a further incentive to lend. I think it is all but inevitable that the spreads are going to narrow dramatically within a couple of weeks.