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Financial conditions are not all that terrible

This is a chart of financial conditions as measured by Bloomberg. It "combines yields spreads and indices from the Money Markets, Equity Markets, and Bond Markets into a normalized index. The values of this index are z-scores, which represent the number of standard deviations that current financial conditions lie above or below the average of the 1992–June 2008 period."

Yesterday the index registered -.92, which is better than the May 20th low of -1.53 and far better than what we saw in the runup to the Lehman crash. Swap spreads in the U.S. are about average, the Vix index is elevated (just under 30 today), and European swap spreads are elevated (2-yr swap spreads are just under 80 bps). The world is very worried about a Greek default or restructuring, as evidence by the 950 bps spread between 2-yr Greek and German bonds (bottom chart), enough so that it would be surprising at this point if Greece did not default; a significant default is effectively priced into the market today. In short, things could be a lot better, but this is hardly a crisis, disaster or a replay of 2008.

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