Where There's Smoke, There's Ice-Nine: The European Liquidity Freeze Explained

Last week Zero Hedge was the first (and so far only) to notice there was something disturbing in the European interbank market (here and here), where various [blank]-OIS spreads had blown out on a relative basis to levels that while not indicative of an imminent liquidity crunch confirmed that the liquidity in the overnight funding market, all of is backstopped by the ECB, was disappearing fast. Now, courtesy of the Guardian we know of at least one of the reasons for this troubling observations: "Senior sources have revealed that leading banks, including Barclays and Standard Chartered, have radically reduced the amount of unsecured lending they are prepared to make available to eurozone banks, raising the prospect of a new credit crunch for the European banking system. Standard Chartered is understood to have withdrawn tens of billions of pounds from the eurozone inter-bank lending market in recent months and cut its overall exposure by two-thirds in the past few weeks as it has become increasingly worried about the finances of other European banks. Barclays has also cut its exposure in recent months as senior managers have become increasingly concerned about developments among banks with large exposures to the troubled European countries Greece, Ireland, Spain, Italy and Portugal." As expected, where there is smoke, or blowing out liquidity spreads, there is fire, or in this case Ice-Nine. Next, we will be shocked to learn that there is a comparable trend in China (as also proposed by Zero Hedge), where the 1 week SHIBOR rate continues to be near 2011 highs.

More on the latest European Nash equilibrium collapse:

Moves by stronger banks to cut back their lending to weaker banks is reminiscent of the build-up to the financial crisis in 2008, when the refusal of banks to lend to one another led to a seizing-up of the markets that eventually led to the collapse of several major banks and taxpayer bail-outs of many more.

Simon Adamson, a banks analyst at CreditSights, said it was clear many eurozone banks had been having trouble funding themselves for several months.

“Clearly there are some banks that are finding it difficult to access markets. I think this is a long term sign of the way the markets are going,” he said.

Spanish banks have become the main focus of market concerns with the latest European Central Bank (ECB) figures showing that Spanish banks have been forced to increase their use of ECB lending facilities and borrowed a total of €58bn (£51bn) in May, up from €44bn in April.

“We have been amazed at the ability of Spanish banks to find ways to fund themselves, but it is clear they are running out of options,” said one senior analyst at a major investment bank.

Indeed they are. And if this Tuesday's Greek vote of confidence fails, the options will be completely gone, and the much delayed game of serial bankruptcies can finally begin.


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