As we noted last week, the EURUSD cross-currency basis-swap - or European bank's most desperate way to fund itself in the absence of any further ECB aid, a lack of collateral, and no interbank-lending (trust #fail) - is flashing a warning light. Today that light went ultraviolet. For maturities beyond the LTRO (greater than 3Y or so) the current level of stress is greater than at the end of November last year [6] which was the trigger for the globally coordinated central bank response. 3Y basis swaps are now back above 70bps (below -70bps) and near record lows - signaling a real desperation for term funding among European banks - as we explained here [7]. Translated: central bankers are now calling each other and planning; the only question is what they can do this time: last time the FX swap margin was cut from OIS+100 to OIS+50 bps. Now what: interbank lending at no cost? - Thank you Uncle Ben.
3Y EURUSD basis swap rates are crisis-like...
[8]
and normalized to the 11/30/11 levels of last year's critical global intervention, we are worse now...
[9]
As we said just last week [7]...
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).
Charts: Bloomberg