four factors to gauge the credit market condition in the first month of 2008

Spread of LBIOR over Fund Rate --One important indicator will be the difference between key central-bank interest rates and the rates that banks charge each other to borrow money. The bigger the spread, the more reluctant banks are to lend to one another. --In August and November, the difference between the rates bank charge each other for loans and the expected interest rates charged by central banks widened to more than a full percentage point. Such spreads are typically less than a fifth of a percentage point. The November spike eclipsed surges seen during the 1998 financial crisis and in the run-up to Y2K, according to Morgan Stanley. Fed --The second factor is what the central banks do. Early next month, the ECB will have to decide whether to roll over the short-term loans it made this month or withdraw the stopgap funding. If the ECB siphons that cash from markets when funding pressures may be rebuilding, credit markets could seize up again. --The Fed isn't putting as much money to work in markets as the ECB, but its new auctions may help bolster bank confidence if banks show that they don't have trouble repaying the loans, says Ed McKelvey, senior economist at Goldman Sachs. "What the Fed is hoping is that if banks start to trust one another again, you can unlock the money and that can have a beneficial effect," he adds. Commericla Paper --The third factor is the commercial-paper market. In January, about $300 billion of commercial paper backed by assets such as mortgages will come due, according to Federal Reserve data. Yet the market for this kind of debt, typically issued by conduits and structured investment vehicles, is quickly shrinking. For the week that ended Wednesday, outstanding asset-backed commercial paper, measured on a seasonally adjusted basis, fell to $748 billion, compared with $824 billion at the end of November. The amount outstanding peaked at nearly $1.2 trillion in August. Earnings --Finally, there is earnings season. Banks start reporting annual results in mid-January. These figures will be important because they are signed off on by auditors, who have taken a tough stand when it comes to marking down securities linked to mortgage debt.