Markets concerned about funding problems in the European banking sector have turned their attention to U.S. banks in the past two weeks. We previously wrote about how financial conditions are at their weakest since Lehman, and Morgan Stanley’s stock took a hard hit this past week. Now all the chatter is about how long it will take for this to spread to the non-financial sector.
For now the non-financial sector has only seen minimal contagion. SocGen analyst Anita Markowska says that corporates are far less dependent on banks and capital markets now than they were in 2008 but the financial sector is crucial to the economy and to small businesses in particular. Moreover, she says the gap between financials and non-financials was similarly wide in mid-2008, but non-financial spreads eventually widened sharply as the crisis spread through economy. So what is her prognosis?
“Could the gap close via contraction in financial spreads? It is certainly possible, but the longer the European sovereign crisis goes unresolved, the greater the risk that contagion will eventually spread to the broader US economy.
…We see QE3 as the most likely next step, but our central scenario is that it will not happen until 2012 when inflation moderates. As far as nuclear options, several Fed officials have mentioned price level targeting as an option, but Bernanke has been cautious not to endorse it publicly. We do not expect a change in his stance for now.”
Now here’s a look at financial and non-financial CDS spreads in the U.S.
Photo: Societe Generale
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