As the European crisis gets worse, banks are getting more cautious about lending to one another.
The “TED Spread,” which is the difference between Treasury yields and LIBOR (the London Interbank Offered Rate), is thought to be a good indicator of the direction of credit availability in the economy. When the TED Spread is rising, as it is now, banks are demanding higher interest rates for lending to one another and credit is tightening. When the TED Spread dropping, credit is becoming looser.
The TED Spread has been rising all year.
From Bloomberg, here’s the TED Spread over the past month:
And here’s the past year:
As the longer term chart below shows, we’re nowhere near the extreme levels we hit in the 2008 crisis, but we’ve now hit the upper bound of normal. And as the longer term chart also shows, we can go from “concern” to “crisis” literally overnight.
Here’s the past 5 years:
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