How the Europe Banking Crisis Affects Your Interest Rate

Remember the banking crisis of 2009? Same saga playing out in Europe, in 2011. The players differ, but we can make direct comparisons (e.g. the United States, a republic of 50+ states vs the European Union, an economic union of 27 states). I suppose to take the analogy one step further, Germany would be the responsible budget surplus generator (like North Dakota) and Greece would be the broke, spoiled child (like Neveda). The US Federal Reserve Bank is like the European Central Bank (get it?).


When are "things" bad? I say it's when nobody wants to lend, even to a bank. The TED spread measures the spread (fear) US banks require when lending short term to one another (beyond what's considered the risk free interest rate of a short term US Treasury Bill). At the height of the 2009 crisis, the US TED spread spiked from a historical level of 0.5% to 4.5%. Since 2009, the spread returned to historical levels of 0.5%.

However, take a look at the *European equivalent of the TED spread: It spiked from 0.25% to over 0.5% in July and measures 0.83% on September,9 2011.

The takeaway? The widespread financial uncertainty the United States experienced in 2009, has come to EU member countries.

How does this affect your business? It affects American prime borrowers (individual and corporate) by making interest rates very low for the forseeable future, as lenders seek to redeploy their cash into safe assets (hey, we already had our crisis). As an example, the 30 year fixed mortage interest rate hit a new all time low of 4.01% on 9-29-11. Based on the Fed's late September plan to drive long term rates even lower, this trend appears to have staying power.

*The spread between three-month LIBOR and the three-month Eurpoean Central Bank yield (i.e. the premium banks are required to pay over the rate the government is expected to pay).