The premium European banks pay to borrow in dollars through the swaps market is at the highest since the collapse of Lehman Brothers Inc. in 2008, signaling that equities will extend their losses.
The CHART OF THE DAY shows the premium for European banks to convert euro-based payments into dollars has increased to the most since late 2008. The three-month cross-currency basis swap today fell to as much as 160.5 basis points below the euro interbank offered rate, or Euribor.
It’s a measure of the “true euro-zone liquidity crunch,” said Conor Howell, head of ETF trading at Christopher Street Capital in London. “It’s hardly a positive that it has reached -150 basis points.”
Banks have led a 19 percent plunge in the benchmark Stoxx Europe 600 Index so far this year amid concern policy makers are struggling to contain the debt crisis that has Greece on the brink of a default and has seen Italian borrowing costs surge to euro-era records. The euro has fallen to a seven-week week low and German bund yields have climbed this week.
“There is more evidence of a flight from all things Europe,” Howell said. “What’s unnerving right now is the recent breakdown of the positive correlation between European equities, the euro and bund yields. Since mid-November, bund yields have risen, yet equities and the euro are heading lower.”
European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo yesterday urged euro-area politicians to take bold steps toward fiscal union to end the debt crisis and said they should not rely on the ECB. European Union Economic and Monetary Affairs Commissioner Olli Rehn today said in Rome that it looks like contagion is spreading to the euro region’s larger economies.
Exchange-traded funds are securities that provide access to indexes, industries or baskets of other securities.