Are Credit Markets Stabilizing?

Since dysfunctional credit markets act as a drag on the economy and prevent it from recovering, Floyd Norris asks the question if credit markets are thawing.

From The NYT: At first glance, it appears that the answer is yes, at least for high-quality corporate borrowers. The volume of investment-grade corporate bonds issued in Europe and Asia in the first three months of this year was the highest ever for any quarter, while in the United States the total fell just short of the record.

But that glance is deceiving. Corporate bond markets around the world are functioning in large part because of government guarantees. Eight months ago, before the collapse of Lehman Brothers and the rescue of the American International Group, the idea of a government-guaranteed corporate bond would have seemed contrary to basic capitalist principles. Now, such bonds account for a substantial share of corporate bond issuance, generally by banks and other financial companies.
…
A resumption of functioning corporate credit markets would be a strong indication that the credit crisis was receding. But the fact that the current growth in lending is largely a function of government guarantees shows that the credit markets remain far from healthy, even if they are larger than they were in late 2008, when the panic was most intense.

emphasis added

The article’s point is not whether credit markets have improved. The real question is what’s the source of the improvement. If the current credit markets activity is ‘self-sustaining,’ then we could say we have enter a phase of stabilization. However, self-sutainability (if we can call it that) so far has been government-induced, illustrating Floyd’s points that markets continue to suffer because whole classes of buyers have vanished. The charts on quarterly volume of new bond issues going back to 2005 in US, Europe and Asial tell the story »