Credit market thaw, but is it enough?

Isn’t it one thing, then it’s another. Just as many people thought that finally the authorities were doing the right thing, which they did (after wasting much time), we got hit on another front..

At least the authorities got ahead on the banking front.

Big drop in interbank lending rates
Libor rates for three month-euro, dollar decline substantially; ‘programs are all positive’
October 14, 2008 3:02 PM ET

  • (Reuters)—Banks charged each other less for loans on Tuesday, after governments worldwide pumped more cash into money markets and the United States outlined its plan to invest $250 billion in its banks.
  • The U.S. Federal Reserve also offered details of its program to buy commercial paper, a critical funding source for many companies to finance daily operations. The Fed will begin buying some of these IOU’s later this month.
  • The unprecedented government response to combat the global credit crisis of the past year has finally lowered borrowing costs in the interbank market. But the jury is still out whether the billions in dollar, euros and sterling that governments have committed will be enough to bolster market confidence and avert a global recession, analysts said.
  • “The programs are all positive for market liquidity,” said David Albrycht, who oversees the $2 billion Virtus Multi-Sector Short Term Bond Fund in Hartford, Connecticut. “But people are still concerned,” he added.
  • Libor rates for overnight dollars were fixed at 2.18125%, down from 2.46875% on Monday. Meanwhile, the interbank cost of borrowing three-month dollars had its biggest fall since March. Likewise, three-month euros charted the largest fall this year.
  • Other risk measures like interest rate swap spreads and Libor/OIS spreads—the Libor premium over expected official policy rates—also reflected easing market tensions.

But it seems to come too late to save the US economy from what looks like becoming a pretty steep recession. On the other hand, if the financial system is on the mend, one can wonder, how much of the recession is already priced in?

With the Dow down 40% or so, that must be considerable, meaning if indeed credit markets start working again, we could actually be close to the bottom in stocks.

Unless the economy deteriorates so much that financial institutions balance sheets get worse faster than the government plans can repair..