Eurozone Banks Are in the Vise

Looking at the Libor rates day after day – and watching them rise without mercy – is starting to get well, painful.  This is a weekly view of euro Libor:

This is a classic bear steepening in the curve: short-dated rates have risen, but the long-dated rates have risen faster.  And it’s shifting out the whole curve by basis points at a time.  In fact, 3mth and 1yr euro Libor rates have been rising on the order of a basis point per day.  But you have to remember Libor rate calculations trim the data: the 4 highest and 4 lowest are thrown out, leaving the middle 8 to determine rates.  So you know there are 4 other banks that are doing much worse than the middle 8.  And since the panel is made up of sizable banks,

Meanwhile, EURUSD has also been on a tear:

I’m going to take a look at correlations between euro Libor and the euro later, because I think there’s something to that story.  In the meantime, we should probably just note that the currency is strengthening as the bear steepener in rates continues.

A strengthening currency and inter-bank interest rates that are rising by a basis point per day?  Sounds like a real-life stress test to me.  So forget about the stress tests the Europeans did.  And if they think the European banks will have the same rebound that the US banks had, maybe they’d better think twice:

“The question is whether governments can shoulder their sovereign debt if they had to bail out half their financial system on top of it,” said Lothar Mentel, chief investment officer at Octopus Investments Ltd. in London “That is the real worry.”

via European Banks’ Hidden Losses Threaten EU Stress Test – BusinessWeek.

Indeed.  A number of those countries are in worse fiscal shape than we are, with economies that are less dynamic and have poorer growth prospects.  I don’t see how their policies are supposed to inspire confidence.

I think it’s just a matter of time before we see “Bank Fail Friday – Euro edition” unless we get something more than just a bunch of concocted stress tests (again from the Bloomberg Businessweek article):

“You can’t just have stress tests, you’d better prescribe some medicine as well, which is going be more capital-raising,” said Hank Calenti, a credit analyst at Royal Bank of Canada in London. “If some institutions need access to government recapitalization or other improvements, the market needs to know how that’s going to happen.”

Meanwhile, the cost of capital is going up…

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Filed under finance, government, International, macro, Markets, risk management, Way Forward, You're kidding

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