Credit pain spreads to strong companies, other nations

— -- The stock market may have held up Wednesday, but credit markets remain severely strained and show how the root of the financial crisis still festers.

Lenders' reluctance to extend credit is bleeding to even the most solid corporate borrowers and beyond the USA.

The credit squeeze became clearer Wednesday as the rate that banks charge each other to borrow surged. The London Interbank Offered Rate, or LIBOR, hit a record 5.07% from 5.04% based on loans in euros due in a month. It was 4.39% a year ago.

"As the stock market has calmed down, if not improved, the credit markets are deteriorating," says Joseph Balestrino, fund manager at Federated Investors. Worsening credit conditions showed in:

•Globalization of trouble. LIBOR borrowing rates in dollars also surged to 4.0% from 3.93%, the highest rate since January. The big move in LIBOR in euros, though, underscores how liquidity fears are spreading outside the USA, says Roger Lister, chief credit officer of research firm DBRS.

•Historic strain on the most creditworthy companies. Investors are demanding record rates even from top-rated companies, based on the Merrill Lynch U.S. Corporate index. Investors want higher returns because they are increasingly fearful. Credit Derivatives Research's CDR Investment Grade index, a measure of how worried bond investors are about getting their money back, soared 4% Wednesday and is up 267% this year.

The pain was clear Wednesday when General Electric agreed to pay 10% to borrow from Berkshire Hathaway. GE is one of six U.S. firms whose debt still has the top AAA rating from Standard & Poor's.

•Crippling pressure on riskier companies. The credit market is harsh for so-called speculative-grade companies that are smaller or less stable financially. Wednesday, yields on their debt rose to a record 11.24 percentage points above Treasuries of similar maturities, according to Merrill's high-yield index.

That's if they can borrow at all. Lower-rated companies have raised $37 billion from 101 debt issues this year, says Diane Vazza of S&P, vs. $107 billion raised from 247 issuances in the same time in 2007. This hits hard, as two-thirds of non-financial companies are now speculative grade, Vazza says. That's why bond investors want a bailout to help revive credit markets. "I'm not saying it's the best way to get credit started again, but that's what we have," says Josh Stiles of Ideaglobal.