Wednesday, June 20, 2012

Light at the end of the Eurozone tunnel

As these charts show, 2-yr Eurozone swap spreads have dropped to their lowest level since last July. Spreads are down almost 45 bps from the late December highs, and that is a very healthy development—even though at current levels spreads are still "elevated." The Eurozone is not out of the woods by any means, but the level of systemic risk and the liquidity of the Eurozone banking system have improved significantly so far this year. Swap spreads are often leading indicators of the health of an economy, so lower spreads are pointing to an improvement in the Eurozone economy that could become evident in the next several months.

The improvement in spreads undoubtedly reflects the ECB's successful efforts to shore up the Eurozone financial system, by ensuring that banks have access to liquidity.

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