Monday, January 2, 2012

European Bank Stress Continues

Today I saw the news headline on Reuters that EURIBOR went down sharply. While I do not want to rain on their parade, this fact could just be merely a byproduct of ECB's half of trillion euros LTRO operation in Dec.

I decided to pull up EURIBOR chart and compare it with LIBOR-OIS Spread and TED Spread. You can clearly see that while EURIBOR has declined in Dec in anticipation of LTRO and after it, LIBOR-OIS and TED spreads did not confirm the decline.

Here is the reason why: LTRO resulted in enormous deposits by participants back with ECB, money never left ECB's coffers, it just got reshuffled, no overnight bank-to-bank lending is being done in EU. Also I think that dollars are still tight and remain in high demand, even after Big 6 CB's 50 bps reduction of swap rate (more than a month ago). Hence EU banking system-wide stress continues today.

I purposely pulled up 5 yr charts to show that we are at elevated levels and broke out above 2010 highs. But even with this development in progress, we are nowhere near the levels reached during the Lehman's collapse. So while we need to be concerned, it is not the time to get extremely alarmed just yet.

We need to monitor and see what transpires in the next few weeks...

click on charts to enlarge

Update on Jan 3 @ 11:40 pm
One more gauge of EU bank stress, EURIBOR - EONIA Spread shows elevated levels and possible breakout coming.

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