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 (An interesting question is what European MFIs have done with the remaining money they've withdrawn from the European banking system...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).
Euribor doesn't tell you the story because eurozone banks can get any amount of euro-denominated funding they like, from the ECB. They are drowning in euros (have been for 2 years now), there is no demand to borrow it from private counterparties.
ReplyDeleteThe issue is with USD-denominated funding. Banks mostly keep their balance sheets silo'ed by currency. They have USD-denominated debt to finance USD-denominated assets. Now the USD bonds have to be rolled over, and the USD assets have not gone any better since 2007 (although book values have bee frozen at the nicest valuations). So some euro banks need USD badly, and others have plenty of USD but won't lend it in Europe, hence the parking in US banks.
For the "bad" euro banks, USD funding can only be obtained through the Fed-ECB swap lines (to be watched, but little "real time" official disclosures), or by straight out buying USD (liquidating good EURO assets). This has not started yet, it would make the USD rally much more (there was a bout of this in 2008).
So there is a potentially big problem, but concentrated on a few names. The USD libor panel details may give them away.
Stuart, what do you mean by "responding"? You mean more ECB intervention... or?
ReplyDeleteAlex
Worth noting that cash deposits in the US banks are liabilities for the banks. Some have already expressed concern about the volume of deposits recently (although those reports didn't indicate the source of the deposits), and the potential need to raise additional capital to offset the increase in liabilities.
ReplyDeleterebecca wilder thinks Kash made a mistake in his analysis:
ReplyDeleteRegarding foreign banking offices in the US - the transatlantic flow is US to Europe, NOT Europe to US...
http://www.newsneconomics.com/2011/09/regarding-foreign-banking-offices-in-us.html