Money markets are the foundational market which provide lubrication and financing for all others. Long-time readers know that during the heady days of the crisis I often turned to a friend and former who colleague who trades money markets and has done so for several decades.
I turned to him today for insight. The good news is that spreads are not blowing out as they were in previous iterations of this rolling crisis. Spreads are steady.
He does note that the level of activity has dropped off dramatically and customers have taken to the sidelines. He noted that there has been a steady bleed and constant stream of statements and news that has turned participants extra cautious. As a for instance, he noted the Lloyds (NYSE:LYG) statement last week that their HBOS-related loss would be 10 billion pounds. That was 2 billion more than estimates earlier and it has caused a bit of a stir. Similarly, he noted the large loss at Credit Suisse (NYSE:CS) and the instability which could ensue if that continues.
The basic problem that the market confronts currently is that there are many institutions which potentially have substantial problems and there is no economic or political mechanism or entity to impose a solution.
Credit Suisse and UBS (NYSE:UBS) are gigantic institutions. Hypothetically, if their problems mushroom those problems would dwarf the resources that the Swiss government has available to solve them. There are other financial institutions which, if they experienced problems, would call into question the ability or capacity of Belgium and Luxembourg to resolve them
So while the money markets are functioning and spreads are stable, the level of activity has dropped and the level of fear extant among participants is on the rise.