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Overseas credit markets continued to show signs of thawing this week but while the worst of the credit crisis could be over, the full extent of the global economic slump it has unleashed is yet to be revealed.
Lending rates between US banks fell further yesterday to their lowest level in nearly four years as lower official interest rates and Government efforts to shore up confidence in the banking system continued to filter through.
The rate on three-month loans in US dollars - known as the London interbank offered rate, or Libor - dropped 0.12 percentage points to 2.39 per cent, its lowest level since November 2004.
Yesterday was the 19th consecutive trading day on which the rates declined, suggesting credit markets are beginning to return to more normal conditions.
Key factors in the improvement have been the US Federal Reserve's latest 50 basis point rate cut last week, which took its base rate down to 1.00 per cent, and the billions US authorities have pumped into the banking sector.
At the most recent height of the crisis, reckoned to be early last month, the Libor peaked at 4.82 per cent, representing a 3.65 percentage point premium or spread over the effective official rate at the time.
Before the Lehman Brothers collapse in September, which sparked the most critical phase to date, that spread was 80 basis points.
In early 2007, before the crisis, the spread was 8 basis points or 0.08 per cent.
Lending rates are also falling in Europe with the Libor's equivalent at its lowest level since March 10.
The British equivalent declined almost 12 basis points to 5.56 per cent, its lowest since February 1.
Interbank rates are important because they affect the cost of loans in the wider economy, for businesses and individuals.
They skyrocketed in recent months as banks worried other lenders might collapse.
Their continued fall demonstrates that worry is slowly fading, thanks to massive Government intervention, including trillions of dollars in bank debt guarantees, pledges to rescue ailing banks, liquidity injections by central banks and interest rate reductions.
"There has been a thawing from what were hard frozen credit markets," said BNZ economist Craig Ebert, "but it's still a difficult area and it doesn't really change what's happening on the economic front as well, which seems to be getting worse and worse".
Ebert pointed to the International Monetary Fund report in which it trimmed its 2009 global growth forecast by 0.8 per-centage points to 2.2 per cent (see story below).
"Market conditions are starting to respond to these policy actions, but even with their rapid implementation, financial stress is likely to be deeper and more protracted than envisaged (in October)," the IMF said.
- AGENCIES
