European Central Bank

Euro Libor Jumps To One Year High, As Euribor Hits Fresh 2010 High

The most important story nobody talks about continues developing, with both Euro Libor and Euribor (3 Month) jumping to year highs. The much more popular funding rate, Euribor, just hit 0.905%, compared to 0.904% yesterday as tightness across the banking sector continues, on expectations that the ECB may cease providing constant backstops to everyone (1 week Euribor was 0.569%, 1 month: 0.649%). With the European policy rate at 1.0% the collapsing bank lending market may soon pressure banks to go exclusively to the ECB for overnight lending, in addition to all their other funding needs. And to think all this was supposed to be avoided with "successful" completion of the stess farce... And while Euribor has been on a non-stop tear higher, EUR Libor had recently dropped marginally. Well, no more. Market News reports, "The euro 3-month LIBOR rate was up 0.369 basis points on the day to stand at 0.8348%, edging nearer to the official 1% policy rate and at its highest level for almost a year. At the monthly press conference Thursday, European Central Bank head Jean Claude Trichet talked about normalisation of EONIA rates, and raised no concern about euro market rates moving higher. The euro LIBOR/OIS 3-month spread was almost 0.37 basis points wider on the day."

UBS On The Exasperating Euro

And you thought you had a problem timing a currency that trades hundreds of thousands of pips up and down in the span of a month... UBS strategist Syed Mansoor Mohi-uddin can't wait to tell you all about his own personal troubles with the crazy European currency. In a nutshell, UBS, just like Zero Hedge, realizes that QE 2 would be the end of the USD. However, with Europe continuing to be a far weaker continent from a banking/financial standpoint, to believe that the race for the global currency bottom is close to over is more than naive.

Same Liquidity Contraction, Different Day: Euribor Higher, European Bank Liquidity Lower, Spin Endless

Euribor is again spiking by 0.4 bps overnight, from 0.889% yesterday to 0.893% today. In the context of the massive (and insolvent) European banking system, this is yet another indication that all is unwell with Europe's banks, even as the Goebbels brigade goes into overdrive.The interbank lending market does not lie, unlike every single European and American politician. And just to make things worse, the ECB withdrew another E11 billion in liquidity via a reduced 7 Day MRO. From Market News: "The European Central Bank on Tuesday allotted E189.9864 billion in its main seven-day refinancing operation at a fixed rate of 1.0%. The ECB satisfied all of the 151 bids received. Today's operation resulted in a net drain of E11.2996 billion after the ECB allotted E201.286 billion in its 7-day MRO last week."

Guest Post: Gold Swap Signals the Roadmap Ahead

The news rocked the global gold market when an almost obscure line item in the back of a 216 page document released by an equally obscure organization was recently unearthed. Thrust into the unwanted glare of the spotlight, the little publicized Bank of International Settlements (BIS) is discovered to have accepted 349 metric tons of gold in a $14B swap. Why? With whom? For what duration? How long has this been going on? This raises many questions and as usual with all $617T of murky unregulated swaps, we are given zero answers. It is none of our business! Since President Richard Nixon took the US off the Gold standard in 1971, transparency regarding anything to do with gold sales, leasing, storage or swaps is as tightly guarded by governments as the unaudited gold holdings of Fort Knox. Before we delve into answering what this swap may be all about and what it possibly means to gold investors, we need to start with the most obvious question and one that few seem to ask. Who is this Bank of International Settlements and who controls it?

Confirmation That Only Sovereign Bond Losses On "Trading Books" Will Be Considered Validates Stress Test Irrelevancy

The circus in Europe can't come to an end soon enough. As Zero Hedge posted and speculated previously, according to a draft document, it has now been confirmed that banks will only be tested for sovereign debt exposure just on trading books, not on debt held to maturity. Guess what: about a month ago, all banks almost certainly decided to quietly reclassify their hundreds of billions of sovereign exposure from "trading" to "held to maturity," thus taking advantage of the same FASB 157 accounting abortion that America has gripped tightly on to for almost two years now, as accounting fraud follows the Bernanke Put in going global. If this is supposed to inspire confidence, then the market has truly lost it. As we explained last week, "the haircut will only pertain to
trading books. In other words this is Europe's equivalent of FASB 157:
everything that banks hold "to maturity" will not see a major haircut,
and very likely not see any haircut at all. Which simply means that all
European banks that hold such debt will merely reclassify their Greek
exposure from trading to a "held to bankruptcy at par" category. The
surreality of European banking assets (which as we pointed out
previously is a $100 trillion circle jerk where one bank's assets are another bank's liabilities) has now passed well into the twilight zone." In other completely irrelevant news, the micro trading books will see the following haircuts, as presented by Bloomberg.

Greece Places €1.95 Billion In 3 Month Bills At Fresh Record 4.05% Rate, 3.85 BTC Versus 4.61 Prior

Things are so back to normal in Europe that even a country living exclusively on ECB life-support can barely pull off a 3 month Bill auction. The interest on the just auctioned off €1.95 in Bills which had to be completed as else Greece will be officially bankrupt (as opposed to just make believe) with existing bills rolling and no more cash in the Treasury, was a whopping 4.05%, compared to 3.65% in the most recent April 20 auction. Yet despite this ridiculous yielld, the Bid To Cover still declined from 4.61 to 3.85. Also compare this to the 4.65% yield on the 26-Week Bills issued last week, and you get a postcard picture of financial health emanating from the beaches of the Aegean. One thing is certain: Euribor and short-term funding are completely unavailable to any Greek institution.

John Taylor Says The Euro Is Like A "Headless Chicken", States Prop Trading Makes Up 80% Of Goldman's Revenue

John Taylor is his usual painfully forthright, objective and candid self in this must read interview in which he analyzes the prospects before Europe (not good), and compares the Euro to a "chicken, with a severed head running across the yard before it dies." Taylor believes that so long as Europe continues to exist in its make believe monetary never-never land, any efforts to bring some form of fiscal rationality in the form of austerity, will be underminded by the continuing lies on the monetary and financial stability fronts. This fits in with Roubini's recent admonition that Obama should finally start treating Americans as adults. Yet in light of recent evidence that Obama has taken more vacation time and golf breaks than even his predecessor, any chance for him to be taken seriously may be long gone. Furthermore, Taylor notes that instead of the ECB demonizing FX traders like himself, the bureaucrats should be thanking him, as he is one of the few voices of reason, and just like in the Asian crisis of 1997, those who listen to him ultimately prevent major capital losses (kinda like what ZH suggested to those invested in Greek bonds some time ago, to the utimate chagrin of an overly defensive RBS). Yet the most notable observation to us at least, is that Taylor confirms our previous statement that Goldman is lying about the contribution of prop trading to its top line. Of Godman's revenue, Taylor says: "80 percent of the revenues which now come from proprietary trading of the bank. No matter what happens, Goldman Sachs always profits." Compare this to our statement from December 2009: "Goldman's head of PR claims the Goldman's prop trading accounts for
only 12% of net revenue. Zero Hedge disagrees, and we would like to
pose a question to Mr. van Praag which we hope Goldman will answer for
us in order to refute our observation that Goldman may be disingenuous
in its public statements.
" Goldman's subsequent response to us did nothing to refute our allegation: "We’ve said publicly that prop trading represents approximately 10% of this year’s reported net revenue.  We generate the vast majority of our revenue in FICC by facilitating trading activity for our clients and nearly all our revenues in FICC are “due to capital at risk” (your phrase)." Shortly after this exchange, finally bringing due attention to Goldman's prop trading operations, the Volcker Rule appeared, and all else equal, will likely impose major restrictions on Goldman's top line, which could be as big as an 80% cut.

Spanish Banks Borrow Record €126 Billion From ECB In June As Country's Funding Lock Out Enters Third Month

For all those celebrating that Spain and Greece can peddle a few billion in short-term Bills to the ECB and a few Chinese investors (did SAFE recover yet from the massive drubbing it suffered in its US stock holdings earlier this year when it was begging for more capital?) it may be prudent to consider that, as Bloomberg reports, Spanish banks borrowed a record 126.3 billion euros ($161 billion) from the European Central Bank in June. This represents a 48 percent increase from the €85.6
billion borrowed in May
. Which is why we hope that anyone claiming liquidity conditions in Europe are anywhere even close to normal, will be brave enough to lend even one dollar to Spain's Cajas or appropriately tickered bank Santander (NYSE: STD), because nobody else has done so for over two months!

Reggie Middleton's picture

Why isn't the popular financial media reporting the fact that Greece's funding costs increased after the $1 trillion dollar bailout? Why isn't it pointed out the Portugal's credit rating has been dropped - post bailout? Exactly what is $1 trillion US dollars good for these days - trick question, but I dare 'ya to answer :-)

Reggie Middleton's picture

I've written blog posts calling government officials liars when they said the Greek crisis was over, written posts calling for inevitable haircuts while the bulls said the Greek crisis was overblown, and even put up with BS EU stress tests that won't even account for the possibility of default - or its economic cousin, restructuring. Well, how ironic that the EU puts out the criteria for its banks stress tests sans default/restructuring scenarios today, the same day that Greece releases a press release of a broad restructuring of its hospital debt. Hmmmm.... As realistic as platinum frog farts!

European Stress Tests: "All Is Not Well" - ECB Likely To Delay Liquidity Unwinds Until Next Year Causing EUR Lift Off

How many more European trips will it take for Tim Geithner to explain just how the "stress tests" work to those damn ECB bureaucrats? Apparently they still haven't realized that the whole point of this sham is to make it seems that all is well, and pump billions of dollars into failing banks, all the while pretending that it is really the "smart money" doing the buying. To quote Market News: "Even as European Central Bank officials lobby for full disclosure of bank stress tests, they worry privately that publication of the details could show many banks in significant trouble, particularly in the periphery of the Eurozone, well-placed sources told Market News International." This should certainly help explain the parabolic, confidence "inducing" move in the EURUSD.

Econophile's picture

Why the G20 meets I don't know. They say lofty things, make empty promises, and go home and do what they were going to do anyway. But wait. There seems to be a huge rift between the U.S. and Europe and I'm not talking about the Atlantic ocean. Merkel vs. Obama. Deficit Reduction vs. Spend. What is happening? Is fiscal sanity breaking out in Europe?

The Ticking Time Bomb That Are The Spanish Cajas

Even with Spain's Cajas, or savings banks, completing the country's most aggressive sector restructuring in history, after nearly 90%, or 39 out of 45 merged or participated in some form of "cold fusion" and benefiting from the financial assistance of the Spanish central bank, there has been precious little written about the actual holdings of this most aggressive lender of mortgage to Spain's 20% unemployed population. Until today: a new report by CreditSights' David Watts indicates that investor worries about the Spanish banking system are very well founded and likely underestimate just how bad the true situation actually is. In "Spanish RMBS: Insider Caja Loan Books", Watts concludes that the Cajas are likely hiding losses on home loans by taking
non-performing mortgages out of securitized pools. Absent this unsymmetrical onboarding of risk, the overall deterioration of the broader pool would have become ineligible as collateral in ECB refi operations. In essence, Watts says, "by buying the loans out of the mortgage pool, the cajas would be taking those weaker loans onto their own books." This implies that the 3.7% serious delinquency rate reported by the cajas is in reality far higher, and likely "underestimates their potential losses." And what's worst: as ever more delinquencies mount courtesy of austerity, and the Cajas run out of cash to constantly buy up the weakest performing loans, all of Spain is about to lose ECB collateral access to its hundreds of billions in securitized RMBS, completely locking the country out of any access to liquidity, even that of the ultimate backstop, the European Central Bank.