European Bank Stress Gauges Hit Levels Not Seen Since Lehman
Measures that gauge the level of European banks’ reluctance to lend to one another are approaching levels unseen since the aftermath of Lehman Brothers Holdings Inc. (LEHMQ)’s collapse.
Banks in the region are paying the biggest premium to borrow in dollars since December 2008, with the three-month cross currency basis swap falling to 90 basis points below the euro interbank offered rate today. The difference between three- month Euribor and the overnight indexed swap rate, a measure of banks’ reluctance to lend to each other, jumped to 0.64 percentage point today, the widest spread since May 2009.
“We’re going back to a post-Lehman scenario where banks are reliant on the ECB and funding is more expensive,” said Marcello Zanardo, an analyst at Sanford C. Bernstein & Co. in London. “This may lead to a credit crunch” if banks can’t pass on all their costs.
ECB President Jean-Claude Trichet last week offered banks unlimited money for six months and extended existing liquidity measures to quell concern that southern European lenders may struggle to borrow in the debt markets. The central bank has also started to purchase Italian and Spanish bonds to stem the sovereign debt crisis.
Banks deposited 145 billion euros ($207 billion) with the European Central Bank’s overnight facility as of yesterday, the most since August 2010. ECB lending to banks rose by 7.75 billion euros last week to 505.1 billion euros.
‘Not a Good Sign’
“Banks are beginning lend more cautiously, and increasingly park their money at central banks,” ECB Governing Council member Ewald Nowotny told Austrian state radio ORF today. “Bank deposits at the ECB have risen massively. That’s not a good sign.”
The extra yield investors demand to buy bank bonds instead of benchmark German debt surged to 251 basis points on Aug. 8, or 2.51 percentage points, the highest since May 2010, data compiled by Bank of America Merrill Lynch show. The cost of insuring that debt against default surged to a record today. The Markit iTraxx Financial Index linked to senior debt of 25 European banks and insurers rose to 218 basis points today.
Credit Suisse Group AG fell below the lowest price hit during the financial crisis of 2008. The Swiss lender dropped 3.9 percent in Zurich trading to 21.75 francs, the lowest since March 2003. The Bloomberg Europe Banks and Financial Services Index was 0.4 percent higher at the close in London after falling as much as 4.9 percent.
“What you’re seeing is a massive move to deposit cash at the shortest-term maturity, just like we saw a couple of years ago,” said Simon Maughan, head of sales and distribution at MF Global Ltd. in London. “International banks are extremely unwilling to lend to southern European banks.”
‘Spell Out’ Strategy
The ECB’s purchases of Spanish and Italian bonds may be draining liquidity from the interbank markets, analysts said. Unlike the U.S. Federal Reserve’s quantitative easing program, the ECB sterilizes its bond purchases, using term deposits to reabsorb the same amount of cash it spends.
If the ECB chooses to sterilize its Italian and Spanish bond purchases by holding bank deposits of the same size, that could encourage banks to boost their deposits at the ECB rather than lend to each other, analysts said.
“The ECB needs to spell out what the strategy for its bond purchases is and the net cash impact,” said Jonathan Tyce, senior analyst for the Bloomberg Industries European banking team in London. “Falls across the banking sector and a rise in Euribor-OIS -- despite falling Italian and Spanish yields -- suggest the market is concerned about sterilization and as a result, negative impacts on bank liquidity.”
The yield on 10-year Spanish government bonds has fallen 120 basis points in the past week to 5.06 percent today. The yield on Italian debt of a similar maturity slid 95 basis points to 5.18 percent in the same period.
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