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The spreads for credit default swaps – essentially the price to insure five-year bonds – have hit all-time highs in the past two weeks for the big French and Italian banks, as well as Spain’s Banco Santander. The index of five-year bank CDS’s is now trading wider than during 2008, when the collapse of Lehman Brothers froze interbank lending and sparked a credit crunch.
Three-month interbank lending rates for euros are at their highest levels since 2009, and Italian use of the European Central Bank funding facilities doubled in July to €80bn, the highest level in at least four years.
“At the centre of the problems in the market is the growing probability being [factored] into the market of a global banking crisis,” said Jeffrey Gundlach, chief executive at Doubleline, a money manager.
“Banks are lending money to other banks and other countries, and the markets are thinking about whether those loans and bonds are going to be paid back.”
The broader situation is nowhere near as severe or as unstable in 2008. Not only do US and European central banks have in place more emergency facilities and are prepared to use them. But also new data out on Friday from the Federal Reserve showed that US branches of foreign banks increased their cash assets from $758bn for the week ending August 3 to $813bn. The increase confounded analysts who had predicted a big drop that would show European banks were having trouble raising dollars. But there are some deeply ominous signs.
European banks remain far more dependent on short-term dollar funding from the wholesale markets than their US peers, so any pullback from investors tends to hit them harder. Most European banks had little trouble raising funds in the first half of the year and the largest institutions are 90 per cent through their annual fundraising process, according to a recent Morgan Stanley report.
But issuance of senior debt and covered bonds dropped off sharply in July and basically stopped in August.
“We’re not confident that the term funding markets will reopen in September with sufficient depth and good enough pricing for southern European banks. A European temporary bank funding guarantee scheme backed by the European financial stability facility could make a real difference to restore confidence,” said Huw van Steenis, Morgan Stanley banking analyst.......
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