Interest Rate Roundup

Thursday, October 02, 2008

It could be worse; We could be Iceland!

If you think our credit market conditions are tight, get a load of what's happening in Iceland. This chart shows the exchange rate of the Iceland krona against the U.S. dollar. It's inverted, meaning a rise in this chart shows a decline in the value of the krona. Each dollar now buys about 113 krona, up from 58 back at the recent low in November 2007. The krona has plunged 22% this week alone to the lowest level against the buck since at least 1992.

What's going on? A full-fledged capital exodus/credit crunch/flight from risk. The government had to step in and purchase 75% of the country's third-largest bank Glitnir Bank a few days ago after its short-term funding went "poof." S&P and Fitch have cut the country's sovereign debt ratings, triggering a massive run on the country's bonds and currency.

So before you freak out about paying more for a jumbo mortgage or auto loan, just be glad you're not trying to buy a car in Reykjavik.

2-year swap spreads are blowing out again today, recently up about 10 bps to 166.25. The intrday peak eclipsed the high from 9/24. Translation: Credit fears are still high and worries about counterparty risk are elevated.


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