There are two channels through which the present credit crisis can affect economic activity. The first is prices, making credit more costly, and the second is quantities, making it scarcer. Dearer credit is called a "credit squeeze" and while scarcer credit is called "credit crunch". The euro area seems to be suffering neither of the two, at least for the time being.
Credit may be getting dearer for at least for four reasons.
-Today's banks tend to face higher spreads when issuing debt compared to non-banks, even of the same rating, thus their lending to non-banks is less profitable or unprofitable unless they get other fees from these corporations or charge higher rates to other borrowers with lower ratings.
-Average inter-bank one- and three-month euribor rates have gone up from 10bp a year ago to 80bp today over the OIS (overnight index swap) or EONIA, which is a proxy for future central bank rates.
-Banks are re-pricing their credit because they finally have found out - after experiencing an increase in non-performing loans - that they were lending at too cheap rates for the risk that they were taking.
-Banks' credit default swap or the market price for insuring their risk of default has gone up more than that of non-banks.
Credit may be becoming more restricted for two reasons.
Banks have been forced to do large write-downs of many of their assets that have depreciated using IFRS mark-to-market valuation.
As of today, total write-downs by large banks in developed countries have reached around $400 billion, but they have been able to raise capital by around $300 billion to be able to continue lending.
