Easy money is gaining traction
􀂄 The credit crunch is losing intensity
The latest Fed and ECB surveys of credit standards showed that only a minority
of banks continued to tighten credit standards for corporate loans, 40% in the US
and 43% in Europe. While this hardly speaks of outright accommodation, it is an
encouraging signal that the ‘second derivative’ of credit standards is now positive.
In Japan, the drastic measures taken by the BoJ and a re-intermediation of the
banking system have already produced a net improvement in credit standards.
Easing of credit standards will be a slow process
Our sector analysts report that banks have the capacity to extend new credit to
‘good customers’ but are not seeing sufficient demand from them. The mood
among banking industry leaders remains sombre, especially with respect to
Europe and the US. Default rates will keep rising at least through to the year-end,
putting more pressure on banks’ balance sheets and inducing continuing caution.
Demand for credit very weak, but should gradually firm
The latest Fed survey shows that demand for commercial and industrial loans
remains weak, while demand for mortgages and consumer loans is rising. In the
Europe, demand on the part of companies remains weak, but consumer loans
showed a moderate improvement. If the recent recovery in economic sentiment
continues, as we expect, the demand for credit should gradually rise.
Lending rates have fallen and will keep declining
Money market rates have kept falling in recent week thanks to vigorous actions by
central banks, and are now at historical lows. This will in all likelihood lead to a
decline in bank lending rates in our view even as banks are unlikely to fully pass
through the decrease in policy and interbank rates. Corporate bond yields have
also fallen sharply, though spreads remain very high by historical standards.
Monetary policy is gaining traction, though lags will be long
Monetary policy always works with lags. These lags will be probably longer in the
current cycle given the severity of the crisis, but low interest rates and higher
equity prices will ultimately boost the economy even if banks remain prudent in
extending credit. Furthermore, an extremely loose monetary stance is supporting
the profitability of banks, cushioning the impact of rising loan loss provisions and
preventing a worsening of the ‘negative feedback loop.’
Money market rates set to decline further and stay low
The healing process in the banking system will be slow. Only in recent months
have money market rates fallen to new lows, and further declines look necessary
in order to provide the needed accommodation. Even though ‘unconventional
policies’ may clawed back in 2010-11, rates will probably have to stay lower than
currently discounted by the market. Coupled with growing concerns about the rise
in government debt, this points to further steepening of yield curves in our view.

Contents
Easy money is gaining traction 3
Loan officer surveys: Less bad, but not good 6
US: The shadow on credit 8
Canada: Virtue or vise? 10
Eurozone: Extended credit freeze? 12
UK: Credit very tight, but bottoming? 15
Japan: Corporate liquidity-at-hand recovers on bank
lending growth 17
Australia: After the budget 19
EM Asia: Credit checkup 21
EEMEA: The credit crunch is easing 24
Latin America: The long credit thaw 28
Global economic calendar 30
Global forecasts 31