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French banks at center of new funding crunch | Reuters

"With banking rumors surfacing yesterday, it feels like the run-up to Lehman's collapse, where banks don't trust each other," said Commerzbank rate strategist Christoph Rieger.

The three-month euro-dollar cross-currency basis -- which reflects the premium for swapping euro Libor into dollar Libor -- widened to as much as 95 basis points, up around 40 bps since the start of August, though still well short of the 300 bps seen at the height of the financial crisis.

Emergency overnight borrowing from the European Central Bank surged, with banks taking over 4 billion euros of overnight funds from the ECB, the highest since mid-May.

The signals coming from Europe set off alarm bells in Asia. Banking sources told Reuters that one bank in the region had cut credit lines to major French lenders, while five others were reviewing trades and counterparty risk.

Investors saw the latest loss of confidence as a sign that few of the problems that brought bank lending screeching to a halt last time around have really gone away.

"The market is already broken. It has never fully recovered anyway from 2008. Liquidity comes in fits and starts, and risk appetite in the banks is understandably very modest," said Stephen Snowden, fixed income manager at Aegon Asset Management.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Aug 11th, 2011 at 12:43:58 PM EST
FT Alphaville: Funding stress in Euroland, continued
Funding really becomes a concern where it impacts the long end, i.e., if a bank cannot independently fund in the senior unsecured debt markets, it does not have a long-term viable future. While issuance has been negligible since July, this is because large EU banks have pre-emptively funded typically 70-90% of their 2011 needs, limiting the need for additional issuance into troubled markets. BNP is 100% complete, while SocGen has completed 93% of its 2011 funding.


About that long-term issuance Nomura mentions at the top by the way -- it's worth reprising some recent charts from Morgan Stanley bank analyst Huw van Steenis. They show the recent slowdown in markets and also the funding needs into 2012:

There follow two very scare charts, one of bank funding drying up to a trickle in the first half of this year, and the other of all the European banks' debt rollover needs for the next few years.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Aug 11th, 2011 at 02:10:46 PM EST
[ Parent ]
The advantage of short-term funding is to increase leverage and short-term "investments-per-year."  

The disadvantage is when things turn sour leverage works against you and those short-term investments turn into near and long-term investments you have a hard time, or find impossible, to get out to pay Due and Payable Accounts.

Migeru and kcurie have been working on the math of this and Migeru talks about it here.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Thu Aug 11th, 2011 at 02:52:47 PM EST
[ Parent ]
Well, in a properly run central banking system, the CB should act as market maker of last first resort between long and short term funding. So the problem is not, in a properly run central banking system, in the nature of short-term funding (of course in the central banking system we actually have, we are saddled with the ECBuBa...). The problem is in the nature of the geometric effect of leverage upon the solvency of holders of garbage assets.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Aug 12th, 2011 at 05:58:54 AM EST
[ Parent ]


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