Europe Is Knock, Knock, Knocking On Chairman's Door
In the middle of the European crisis last fall, EUR-USD cross-currency basis swap spreads were on the tip of every trader and media-personality's tongue as the critical means for providing banks with access to short-term USD liquidity was ratcheting lower and lower. This means the European banks were willing to pay a higher and higher premium to be able to offload their EUR funding into USD funding. With LTRO funding now faded and perception of the sustainability of European banks becoming dismal, US banks are charging ever higher rates for Eurozone banks to borrow. What is more worrisome is that with the relative liquidity of USD assets, it would appear that the widening in the basis swap spread means the European banks have run dry of money-good USD collateral to unwind. This repricing of USD liquidity costs (now at 4 month highs and increasing rapidly) suggests that the Fed-provided swap lines could get a fresh calling to save the day and/or just as we have noted so many times in the past, the collateral squeeze continues to be the critical part of Europe's demise (and thus negates anything but absolute monetization by the ECB as a solution for the banking system).
EUR-USD basis swap spreads plummet back to crisis levels...