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European Interbank Spreads Easier, But Have a Way To Go

In order to gauge whether credit conditions in Europe are improving or worsening, I posted an article on the European TED spread a few days ago - "What is the European TED spread signalling?"

The difference between the LIBOR rate and the overnight index swap (OIS) rate is another measure of credit market stress.

When the European LIBOR-OIS spread is increasing, it indicates that banks believe the other banks they are lending to have a higher risk of defaulting on the loans so they are charging a higher interest rate to offset this risk. The opposite applies to a narrowing European LIBOR-OIS spread.

As shown below, the movement in the European LIBOR-OIS spread over the past few weeks is similar to the European TED spread and indicates that confidence in interbank lending has started improving, but the European LIBOR-OIS spread needs to show a more meaningful decline in order for a calmer environment to prevail.

European LIBOR-OIS
Source: Fullermoney.com

European LIBOR-OIS
Source: Fullermoney.com

 


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