Funding Curves Update and A Curious Observation

If you remember, I wrote a post last week that looked at the relative spreads between dollar and euro-denominated funding curves.  I presented this chart in that post:

Fast-forward a week, and here’s an update that spans from May 6 to May 14, again using data from the FT:

We should note several things from this update:

  • First, spreads between dollar and euro funding curves have only compressed – not widened.
  • Second, the spread between overnight dollar Libor and euro Libor is now negative.  So in other words, this point plus my first one highlight that dollar funding needs have only grown – not shrunk.
  • Third, on May 11, there was a dramatic spike in the spread for overnight euro Libor versus overnight dollar Libor, then it went back to being negative.  So my question is this: was there a bank run?  The only reason (in my mind, anyway) we would see a spike like that was if depositors were running to the banks to pull their euros out en masse.
  • Fourth, overnight dollar Libor is trading above Fed funds.  It makes me inclined to believe we’ll see effective Fed funds over 25bps soon – outside of the Fed’s range.

I also put these charts together that show how rates have moved from two perspectives: the first shows how these rates all moved through time while the second shows how the yield curve has changed through time.  The first pair of charts is for dollar Libor and the second pair is for euro Libor.

The last two charts of euro Libor show that overnight Libor spiked pretty intensely for one day.  I went back to May 11th to get a sense of the newsflow, and here’s what I found:

FRANKFURT, May 11 (Reuters) – Deutsche Bank (DBKGn.DE) said European banks could face losses of between 50 billion euros ($63.5 billion) and 75 billion if the debt crisis in Greece continues to escalate and banks are forced to take a “haircut” on Greek sovereign debt.

via UPDATE 1-Europe banks may face 75 bln eur Greek hit-Deutsche | Reuters.

So Deutsche sees writedowns and haircuts.  Shocking.  Then there was this from Moody’s:

Moody’s in a “special comment,” called the sovereign debt crisis “unprecedented.” European Union finance ministers agreed to an emergency loan package on Monday that with IMF support could reach 750 billion euros ($1 trillion) to prevent a sovereign debt crisis spreading through the euro zone.

“Contagion has spread from Greece — historically a weaker credit in the context of the euro zone — to sovereigns with stronger credit metrics like Portugal, Ireland and Spain,” Moody’s said.

via Moody’s sees European contagion | Reuters.

That would’ve moved the market for Greek debt as the last few remaining Greek debt holders – like those who fought under Colonel Custer to the bitter end at Little Big Horn – would’ve been forced to capitulate and have their butts handed to them.  Literally.

Finally, there was this:

BRUSSELS/PARIS, May 11 (Reuters) – Franco-Belgian financial services group Dexia SA (DEXI.BR) reported a higher than expected first-quarter net profit, boosted by a one-off capital gain, and revealed its exposure to Greece.

The company, kept afloat by a bailout and state guarantees in late 2008, said in a statement on Tuesday its exposure to Greek sovereign debt was 3.7 billion euros ($4.7 billion), with little to no exposure to Greek banking, local authorities and corporates.

It added its insurance companies had exposure to a further 1.2 billion euros of Greek sovereign debt, but this was less of an issue for Dexia itself.

Dexia had a 19 billion euro exposure to sovereign bonds at the end of 2009, of which 18 billion euros rated AA or below. It did not give a breakdown per country.

via UPDATE 2-Dexia reveals 3.7 bln euros Greek sovereign exposure | Reuters.

Now, I don’t know much about Dexia, but that sounds like a lot of sovereign debt rated AA or below for one firm to carry.  And of that $18bn, almost $5bn is in Greece.  But whether they experienced a run or not on the back of this release is unclear.  They have a sizable balance sheet at €588bn, so if they got wobbly, it would matter.

Needless to say, Libor funding data is something that bears watching for the short to intermediate term.

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