Where There's Smoke, There's Ice-Nine: The European Liquidity Freeze Explained

Tyler Durden's picture

Last week Zero Hedge was the first (and so far only) to notice there was something disturbing in the European interbank market (here and here), where various [blank]-OIS spreads had blown out on a relative basis to levels that while not indicative of an imminent liquidity crunch confirmed that the liquidity in the overnight funding market, all of is backstopped by the ECB, was disappearing fast. Now, courtesy of the Guardian we know of at least one of the reasons for this troubling observations: "Senior sources have revealed that leading banks, including Barclays and Standard Chartered, have radically reduced the amount of unsecured lending they are prepared to make available to eurozone banks, raising the prospect of a new credit crunch for the European banking system. Standard Chartered is understood to have withdrawn tens of billions of pounds from the eurozone inter-bank lending market in recent months and cut its overall exposure by two-thirds in the past few weeks as it has become increasingly worried about the finances of other European banks. Barclays has also cut its exposure in recent months as senior managers have become increasingly concerned about developments among banks with large exposures to the troubled European countries Greece, Ireland, Spain, Italy and Portugal." As expected, where there is smoke, or blowing out liquidity spreads, there is fire, or in this case Ice-Nine. Next, we will be shocked to learn that there is a comparable trend in China (as also proposed by Zero Hedge), where the 1 week SHIBOR rate continues to be near 2011 highs.

More on the latest European Nash equilibrium collapse:

Moves by stronger banks to cut back their lending to weaker banks is reminiscent of the build-up to the financial crisis in 2008, when the refusal of banks to lend to one another led to a seizing-up of the markets that eventually led to the collapse of several major banks and taxpayer bail-outs of many more.

Simon Adamson, a banks analyst at CreditSights, said it was clear many eurozone banks had been having trouble funding themselves for several months.

“Clearly there are some banks that are finding it difficult to access markets. I think this is a long term sign of the way the markets are going,” he said.

Spanish banks have become the main focus of market concerns with the latest European Central Bank (ECB) figures showing that Spanish banks have been forced to increase their use of ECB lending facilities and borrowed a total of €58bn (£51bn) in May, up from €44bn in April.

“We have been amazed at the ability of Spanish banks to find ways to fund themselves, but it is clear they are running out of options,” said one senior analyst at a major investment bank.

Indeed they are. And if this Tuesday's Greek vote of confidence fails, the options will be completely gone, and the much delayed game of serial bankruptcies can finally begin.

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AG BCN's picture

I was reading the article this morning thinking that it was big deal, thanks for confirming my suspicions, I'm off to the bank to pull out my max daily allowance of fiat.

Ahmeexnal's picture

The genocidal colonialist powers will have to abruptly end their criminal NATO adventure in Libya.

The big players who bet trillions on Mr. Q are about to rape the idiots who believed NATO would win.

ISEEIT's picture

So I'm feelin' a EUR spike and then TIMBER!!!! Adding to my short cover next. I'm locked down at 1.4050 and underwater. I'll toss in enough to reject a call to 1.50 and I hope it bounces much to the bottom at 1.20 (or parity if you happen to be an extremist). Worst case is that it takes a vertical plunge. Much more difficult for me to play capitalist pig. My favored scenario is a polite cascade down to daddy. I also understand that the fockkers might keep the games 'a goin for a bit longer and I'm fine with that. Patience is a virtue.

Could good old Phoenix be right and the $$$ dies first? Sure, it could play out that way and I claim to understand that side of the trade. I'm putting money on the EUR taking a spanking first though. Might even go long from time to time.

EUR/USD : Ultimate dysfunctional relationship. Tune in!

Cheeky Bastard's picture

But Botin said y/day you guys are fine. /sarc

AG BCN's picture

Ho Ho, Botin is being investigated for tax evasion.

You know after the 2008 meltdown they would show TV programmes explaining that the Spanish banking system was a model for the rest of the world and how they had managed to avoid the crisis, Botin even gave a speech in London to the banking community explaining that he would never invest in something he is not understand, this is before Madoff lost Botin's clients money.


Cheeky Bastard's picture

No, I know, I was just making a joke. But he is right, somewhat, re his bank. STD lowered it's exposure to ESP RE sector well before it collapsed and it has a diversified revenue stream by being a major player in BRA and some other EM markets. BBVA is also, somewhat in a better shape than banks that are purely based in Spain, not to mention cajas. In my opinion he navigated the waters well, in 08, not suffering like other banks did, so I give him credit there, but where he is utterly wrong is macro-economic issues. But that's more pep-talk than what he believes (just read his most recent comments on loan defaults in Spain which have reached a 16 year record in May this year).

Tremain's picture


From which corner of the globe are you pulling said fiat may I ask?

blindfaith's picture

well, since the horses left the barn a few years ago, there is plenty of room now to bring them back before the next storm hits.

Heck, I don't trust my own bank for 'on demand' checking funds.

Eternal Student's picture

Keep in mind that, legally, it's not your money. It's theirs. You've given the Bank a loan. That view has been upheld all the way to the Supreme Court.

Goes along with the old saying "if you don't hold it, you don't own it".

Atomizer's picture

I love the smell of European liquidity freeze in the morning... it smells like victory.

richard in norway's picture

you just like anything that smells bad


i'll save you some of my socks

blindfaith's picture

then again, if the 'need' arises I am sure that the FED will cough-up another 660 billion for the ECB to gamble with...oh, sorry play with...I mean invest, err..well do what ever their little hearts desire to do with US taxpayer funds secretly handed to them.

holdbuysell's picture

And the PMs march north as a result...the beat goes on.

Cdad's picture

No one could see this one coming.  No one.  Impossible. It could never happen.



(Reuters) - Financial trading and interbank lending almost ground to a halt on Monday as banks grew fearful of dealing with each other following Friday's near collapse of U.S. investment firm Bear Stearns, prompting talk of another round of coordinated central bank aid. 

LONDON | Mon Mar 17, 2008 5:54pm EDT


Good luck all ye dip buyers.  This is the moment for which you have been "trained."

Ahmeexnal's picture

Raiders of the Coin Shops?

Urban Redneck's picture

The real threat of a Greek default- another credit freeze due to not knowing exactly who is going to be left holding the bag.

blindfaith's picture

And, since Saturn is now in Aquarius you will likely see suicides as a form of protest begin in earnest.

Seb's picture

Saturn is now in Virgo, not in Aquarius constellation.

uranian's picture

saturn is in libra in the tropical zodiac (please don't harp on about the sidereal zodiac, it's fine by me if anyone thinks astrology is rubbish), and is indeed forming a grand square (astrology's most difficult group of aspects) with mercury, pluto and uranus over the next week to 10 days.


(which by the way you could interpret as fundamental/explosive shifts/challenges to communications infrastructures...i would class the markets as a form of communication).

Seb's picture

I just looked at Saturn with my telescope during recent Lunar eclipse and I am sure that it is now near Porrima (Gamma Virgo) star from Virgo (apparent position, of course).

RobotTrader's picture

I'm surprised the EU Plutocrats haven't made some "announcement" yet.

Looks to me like the PigMen are determined to continue selling the market down in order to wipe out the proles and enrich themselves by picking up "bargains" on the cheap when the market bottoms out.

irishlink's picture

Are we all going to see another horrible week in the markets and who is going to free up this nightmare this time? THE US! At the last event China and the soverign wealth funds were on the sidelines to smooth out the wrinkles. Not so this time and I think things are going to get ugly Very quickly. This can has run out of road.

swissaustrian's picture

European bank CDS´s and puts, bitchez!

gwar5's picture

Insolvent countries are finally being outed by the market. 



Caviar Emptor's picture

Junk bonds spreads blew out on Thur and the ETFs took a plunge as reported by ZH. More smoke to add to the Euro smoke. In addition, WSJ reported that corporate investment grade issuance last week took a serious dip as anxieties are mounting in US markets.


So here's the story: in Euroland and in USland, sovereign debt concerns are crossing over into private debt. Is it any wonder now that everything and anything in the economy depends on the survival and even expansion of the fiat Ponzi. So you can be absolutely sure about 2 things: the US debt ceiling will be raised (complete with polite excuses and chest-thumping austerity threats and promises) and Greece will get bailed out (but the troika will back down on austerity demands as the Greek demonstrators have effectively called their bluff since the alternative to bailout is Ponzi collapse black death)

Bansters-in-my- feces's picture

This all sounds very bullish to me....

You know,...with th Exchange Stabilization Fund and all...

Tyler Durden's picture

As much as we enjoy the latest bout of popularity of the ESF, the truth is that it is a drop in the ocean in terms of systemic liquidity needs. As such while it is a push-pull mechanism to achieve modest Treasury needs, all the true liquidity is and will always be provided by the Fed.

unununium's picture

Yes and with FDIC AND Treasury impotent, we could see direct support for BAC by the Fed.

Then ownership of a large portion of the USA's real estate will be as clouded as the ownership of the Fed itself.

Dollar Bill Hiccup's picture

All Hail the Bernank, Printer of Dollars Seen and Unseen ...

Ice Nine, best Vonnegut IMHO.

disabledvet's picture

the amazing thing to listen to was Greek yields exploding just as they started speaking of them on Bloomberg "in the literal New York minute."  A "new Vienna accord" Tom Keene?  More like "Old Vienna" from where i'm sitting.  (oh and I do miss those OV splits days.  whatever happened to the 8 oz beer?  Apparently "this gives new meaning to the OV Split" of course!)  will someone please explain how "a truck driver can call the annihilation of the European Union?"  Anywho "Clarence Clemons dies" http://www.youtube.com/watch?v=5e4-20tqC4A&feature=player_detailpage, how he stacks up against The Bird is hard to say


although clearly i have my views (and as usual they are strongly held) but i'll just keep that to myself.  I did see "the Maestro" made an appearance vis a vis Greece to "warn of Armageddon."  Where was that one the last time?  


Superslam's picture

Looks like the Eurozone's oncoming liquidity crisis could be the catalyst for QE3, assuming markets in the US follow suit. A strengthening dollar would give the Fed plenty of cover to keep printing.

unununium's picture

The anglo faction appears close to winning the waiting game.

davepowers's picture


Can you draw a connection between the ice nine (good name for it) Euro liquidity squeeze and you post last week that essentially all of QE2 ($600 Bn or so) had been drawn into foreign (euro?) bank balance sheets, probably via fed funds borrowing?


davepowers's picture


Can you draw a connection between the ice nine (good name for it) Euro liquidity squeeze and you post last week that essentially all of QE2 ($600 Bn or so) had been drawn into foreign (euro?) bank balance sheets, probably via fed funds borrowing?


hungarianboy's picture

but.... Friday EUFOSC1 closed down 7.59%

Does that mean anything TD? Also look the intraday spikes.

farmer1's picture

Derivatives, CDS, swaps, etc pull forward future earnings into current periods. Both companies (and/or sovereigns) involved have independent valuations so both sides to an agreement can claim paper profits in the early years while over the life of the investment being short on cash. Think about it - how does this differ from a Ponzi scheme? The only difference is a Ponzi scheme is perpetuated by only one company. Derivatives are a Ponzi scheme by an industry as a whole.

zippy_uk's picture

So this helps explain why the UK is not in the EURO - amen to that. We got burned by Soros when we were in the ERM (Euro forerunner).

This lesson was so sharp, even Labour learned it (only Just, no thanks to slease bag Blair).

AND to that spanner at the top of the post speaking out for genocidal Quaddaffi - once NATO bomb everthing off the table it will turn in to a proxy war where we pay people off - with Quaddaffi money we have siezed in London (none in the US obviously). Its a proxy war from here on in.

By the way - UN resolution passed clearly first time with Arab league support.

Keith Piccirillo's picture

Nice Vonnegut (Cat's Cradle) reference.

Buck Johnson's picture

It's starting again, the banks don't trust the other banks because they are lying to each other, just like 2008.

Buck Johnson's picture

It's starting again, the banks don't trust the other banks because they are lying to each other, just like 2008.

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