The financial crisis in an international perspective Course of events – from increased spreads to bank failures Developments during the financial crisis can be illustrated in several ways, for example by using the so-called TED-spreads1, that is, the difference between three-month interbank rates and government security rates. 1  The TED spread is the difference between an interbank rate and a government bond rate. As the banks lend to one another without collateral (that is, with a credit risk) in the interbank market, while government  BIS Review 7/2009  1  The first signs of problems emerged already at the beginning of 2007 when the interest rates of certain so-called structured products with links to the US housing market began to increase. They fell during the spring but rose again in mid-June 2007 when the US investment bank Bear Sterns was forced to liquidate one of its hedge funds due to major losses. But it was in August that the indications of an approaching financial crisis became clearer and the TED spreads increased significantly. One reason for this was that the French bank BNP Paribas announced that it had stopped withdrawals from three of its mutual funds. The lack of liquidity in certain market segments with financial instruments linked to the US housing market had made it impossible to value the underlying assets. The banks began to protect their own liquidity and were unwilling to lend to each other. The gap between the "uncertain" interbank rate and the safe government security rate increased.
The proportion of Swedish exports has, for example, increased from just over 20 per cent in 1990 to around 40 per cent in 2007. This means that an international economic downturn and a decline in the demand for Swedish export goods have serious consequences for production and employment in Sweden. The financial links between countries have also become stronger and make the Swedish banks dependent on the outside world. Market funding, that is, funding that is not in the form of deposits, accounts for around 60 per cent of their total balance sheets and is acquired on international markets. Both market funding and the banks’ operations abroad have increased substantially over the past ten years. This means that events abroad have an increasing impact in Sweden. The long-term interest rates for government bonds in different countries usually follow one another quite closely. There is also a close correlation between the stock markets and expectations regarding the future. These links may be one explanation as to why the development of GDP in different countries is currently very consistent. Traditionally, there has been a time lag between developments in economic activity in the United States and Europe, such that an economic downturn in the United States has also been followed by a downturn in Europe, but at a somewhat later date.