Three things are occurring in European liquidity markets that should send shivers down the spines of the most ardent bulls or believers in the status quo muddle-through scenario. First, 3-month LIBOR is waking from the dead having risen today after weeks of flat-lining in its irrelevant manner. Second, Deutsche Bank was the main driver of today's uptick in 3-month LIBOR (joining UBS as the only other bank in the LIBOR family post LTRO2 that has raised its willing offer rate for short-term liquidity). And third, most importantly, 3-month EUR-USD basis swaps (that expensive but anonymous market-based investment vehicle to find USD funding) have exploded with their biggest deterioration in five months pushing the premium that banks are willing to pay to receive USD over EUR to its highest in almost 4 months. So while Draghi suggests that we wait to see the effects of LTRO filter through to the rest of the real economy, once again he is clearly incorrect as banks are now desperately seeking liquidity (USD-based in this case) with short-term swaps only having been worse in the middle of the crisis last Fall and UBS and Deutsche Bank willing (or forced) to pay up for short-term money.
UBS and now Deutsche Bank are seeing higher offer rates in the LIBOR estimates...(reflective of both their willingness to pay up for liquidity and other bank's uncertainty with regard their credit worthiness)...
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And 3 month EUR-USD basis-swaps just snapped. The largest deterioration in five-months to the worst level in 4 months implies European banks willingness to pay up significantly for USD funding as we revert back into funding crisis mode...
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and this time - there can be no LTRO to save the day (especially in Spain) as there is simply no collateral left to pledge - so either its a reach-around direct ECB monetization or someone is about to get friendo'ed.
Charts: Bloomberg