Thursday, August 11, 2011

I Just Can't See It

Help me out here. I keep reading scary sounding stuff like this in the NYT:
In an ominous echo of 2008, European bank stocks on Wednesday fell 10 percent or more — and banks in Europe are beginning to hoard cash, crimping the interbank loans that keep the global financial system operating smoothly. While borrowing costs for banks in the United States and Britain have crept up only slightly recently, borrowing costs for Continental banks that lend to one another have doubled since the end of July.

More optimistic market watchers point out that these rates are still well below those at the height of the financial crisis. But they nonetheless are the highest since the spring of 2009.

Because European banks trade billions of dollars daily with their American counterparts, fears of contagion have spread.
The actual Euribor interbank loan rate data are here:

As you can see - rates are not back to the heady levels of 2004-2005, never mind 2008-2009.  And they've dropped in the last few days.  I just am unable to look at this data and summon any fear of an imminent problem*. So is this just a case that the NYT reporter is not numerate enough to actually look at the graph before writing about the subject?  Or am I missing something?

* Not to say there couldn't be a major problem down the road - the ECB has calmed the Italian/Spanish bond markets for the moment, but it's critical that that calm holds.


Poul Andreasen said...

We hear the same story from European newspapers. I understand that the problem is related to the fact that state guaranties for loans issued by particular banks are now running out and must be either reissued or exchanged with real cash. And because the various states are requiring banks to improve their ratio of core capital vs. loans, banks are now being more reluctant to loan to each other because they need the capital for their own core capital. This would eventually lead to increased rates. But sure, the effect still seems to be rather weak if looking at CIBOR.

James said...

I have long been convinced that the European Monetary System is going to break apart, but I think it is very difficult to predict exactly when that will happen.

So if you think, Stewart, that the EMU is going to come apart then I would argue that the NYT is justified in writing scary stuff in that it should be making noises along the lines of "there is going to be a crisis in Europe" - even if the crisis might not happen for another 12 months.

If you don't think the EMU is going to come apart, I would argue that the ECB buying these sovereign bonds (and thus narrowing the spreads) simply kicks the can down the road. It doesn't solve the underlying problem. The underlying problem is a combination of (a) Solvency crises in the periphery, and (b) Germany's unwillingness to pay off the debts of those undergoing the solvency crises.

As CR's graph in this posting illustrated, the long term trend in bond spreads continues to be upwards and the time gap between market panics is getting shorter and shorter.

James said...

The German view on the ECB's recent intervention:,1518,780258,00.html

Well worth reading I think.