We discussed the sudden and scary drop in the EUR-USD cross-currency basis swap last week and how it is perhaps a cleaner view of the funding crisis in Europe than the delinquent Libor market. Since our first discussion, the 3 Month EUR-USD basis swap has widened even further - only worse in the heart of the crisis in Q4 2008. As if that was not enough, GDP-weighted European Sovereign risk is back up to its highest levels ever as the clear message from the markets is the ring-fencing and backstopping of sovereigns and financials respectively is simply non-existent.
The cross-currency basis highlights the difficulties in funding differences between USD and EUR - clearly funding in EUR is possible thanks to emergency (and temporary) ECB measures but they can't print USD and so the stress shows up in the basis swap...
and European sovereign risk (GDP-weighted) is back at its extreme highs.