An ongoing topic discussed recently is the slash and burn ongoing in Europe as banking counterparties have exactly zero confidence (and less with each passing day) in their counterparties. The backstop by the ECB of everything (for now) is the only thing keeping the system from collapsing. Yet with the ECB now at over $1 trillion in backstop funding for European banks, there will be a point beyond which not even the central bank's "credibility" will be enough. Today, we are seeing a spike not only in Libor and Euribor (both EUR denominated), but most notably in the 30 Day Repo rate. The result is a scramble to fund EUR positions. Whether the catalyst was this morning's 6 Day ECB liquidity providing market operation at this point is immaterial: the outcome is one of the biggest surges in the EURUSD in the history of the pair, which at last check was fast approaching $1.25.
This EUR surge is nothing more than a liqiuidity scramble and should in fact be interpreted as EUR adverse and is indicative of an even worse funding pictures in Europe and among European banks. Reader pp explains below:
In dark blue is 3 month cost of euros in Europe in the interbank market (euribor), in purple is cost of USD in Europe (euro libor), and in light blue is 3mth repo in europe. This chart speaks for itself. I may be reading into this too much, but that slight dip in the repo line (light blue) in the end of June could be the quarter-end games played among banks who window-dressed their balance sheets for quarter-end and therefore had less of a need to borrow cash by posting treasuries as collateral across the June 30 "window." Now it's July 1 and the repo rate has snapped higher by just over 4bps to 0.46% - a new 12 mth high.
Of course, the recent acceleration in the rise in Euribor and Euro Libor is also scary, and tells you that banks are really pulling in their horns on each other and continuing to 'hunker down' -- of course, why shouldn't they when nobody knows whether the counterparty has cancer or is just fine? A lender trying to determine an appropriate rate of interest when such binary scenarios/thinking are so well defined is incentivized to just say no, right? I don't amaze much, but it amazes me that we watched this exact reel here 2 years ago and investors still talk about TED spreads or Libor-OIS... talk about generals analyzing the last war. It does NOT surprise me that the press was trying to put a nice face on the lower-than-expected 3mth facility uptake yesterday as the LTRO rolls off. I say: WHO CARES? The real story is the complete collapse in confidence among "highly interconnected banks" who now wish they weren't so connected!