Italian and Spanish bond yields have been creeping up in the last couple of weeks but seem to have taken a very sharp turn for the worse today - particularly Italian bonds. The Italian graph is above and the Spanish one below.
This is a very worrying development and hopefully the European authorities will respond rapidly.
Also of particular interest is this pair of posts by Kash Mansori looking at the flow of bank deposits from Europe to the US:
Putting it all together yields a compelling story: European banks are shifting their cash assets out of European banks and putting much of them into US banks. (An interesting question is what European MFIs have done with the remaining money they've withdrawn from the European banking system... but that's a story for another day.) This has happened at a significant rate, with a net transatlantic flow from European to US banks that probably totals close to half a trillion dollars in just six months.Perhaps the most compelling graph is this one which shows the sharp rise in foreign (mainly European) banks holding cash in their US subsidiaries:
If you're wondering exactly who has been the first to lose confidence in the European banking system, look no further. It seems that at the forefront is the European banking system itself.
Still Euribor rates are not showing any sign of stress:
I don't understand why the alleged lack of confidence in the European banking system doesn't show up at all in Euribor rates. If European banks are suspicious and scared of one another - why are they willing to lend to one another at still-very-low rates? If they all feel fine, why have they moved half a trillion to the US banking system? Is there some technicality about Euribor that is making it an unreliable indicator at present?
P.S. Sorry for the hiatus in blogging last week. I was on business travel from Wednesday on with early meetings or flights each morning. Actually I had three business trips in August which have caused blogging to be a bit spotty. Things should return to normal in September (ie I blog each weekday morning except when the post doesn't come together in time).