The panic has indeed subsided

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Last week, I wrote a cheeky little post called “The Panic is over,” in which I argued that the Panic phase of this crisis would ebb and the more chronic problems of excessive debt, leverage and recession would move center stage. Of course, that very day, the Dow dropped some 500 points and people continued to worry.

But today, we are certainly seeing signs that the panic is indeed over as risk spreads are coming down. It took a while, but it is happening.

Money-market rates fell in Europe and Asia, extending last week’s declines, as policy makers intensified efforts to combat a collapse in bank lending.

The London interbank offered rate, or Libor, for three-month loans in U.S. dollars slid 36 basis points to 4.06 percent today, the biggest drop in nine months, according to the British Bankers’ Association. The overnight-dollar rate lost 16 basis points to 1.51 percent, the lowest level in more than four years. The three- month rate for euros dropped. The Libor-OIS spread, a measure of cash availability, fell below 300 basis points for the first time in almost two weeks.

“The policies put in place by authorities around the world have clearly reduced the risk of more bank defaults, and that’s beginning to loosen up monetary conditions,” said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets. “I expect interbank rates to continue to gradually decline over the coming weeks as central banks flood the market with cash.”

The difference between what banks and the U.S. Treasury pay to borrow for three months, the so-called TED spread, was 137 basis points lower today than on Oct. 10, when it reached the highest since Bloomberg began tracking the data in 1984.
Bloomberg News

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