Europe’s debt crisis: Credit markets are misbehaving again.

It’s quite some time since I updated my last post in this blog. Today’s post, I would like to comment on the debt crisis which has spread all over Europe continent. Worse than that it was expected to hit Asia. Looking at the current situation, investors may no longer be so easily rattled since they’ve survived from the 2008 panic economic crisis.

As Europe’s sovereign debt crisis shows sign of turning into a contagion, infecting everything from interbank lending rates in London to the U.S junk bond market, credit markets a experiencing what the called as a “Dejaa Voo”. The almost $1 trillion pledges by European finance ministers this month to bolster the region’s finances has failed to mollify investors who worry that euro zone trouble could cause another Lehman like disruption in worldwide financial markets.

A primary cause for concern now, as then, is the banks. Independent Credit View(ICW), a Swiss rating company, estimates that global banks may have the capital deficit of more than $ 1.5 trillion by the end of 2011 and some may need state help to survive. Libor, the short term rate at which banks lend to one another, has shot up to 0.53%, the highest since July. It was less than half that as recently as march.

Just a few weeks ago, the credit markets were almost back to pre-Lehman normality. Investors were asking precious little of the borrowers they shoveled money at. As of mid may, 60% of high yield borrowers were able to get away with weaker investor safeguards on new debt, according to Covenant Review, a New York based research firm that analyzes bond offerings.

Caps were removed on the amount of debt companies can carry and fewer restriction were placed on using assets as collateral for future borrowing, effectively reducing what’s available to satisfy creditor claims in a bankruptcy. All of these were symptoms of a larger phenomenon that many viewed as healthy: An appetite for risk had return.

The repricing of spreads in financing markets, sharp and swift though its has been, still does not amount to evidence of anything like the level of stress during 2008. Nor, given that central banks have already revived their backstop measures, do we think that it will?? Financing markets remain orderly and open. This writing however are just my point of view on the current situation on the Europe’s debt crisis. Feel free to stress opinion and write your comment.