By Peter Coy
Mess of the debts of Europe was coming to if long it sometimes considered more a chronic crisis of life or death. But while negotiations to prevent a Greek default drags, investors and lenders are concerned that a banking crisis could emerge, dragging down the continental economy until the Greece still has a chance of failure. September 21, the Monetary Fund International believes that banks in Europe with more than 400 billion dollars in losses and said that weak banks must raise capital quickly.
The heart of the problem? As show the graphics on these pages, some European banks are in danger of losing what they most need: cheap funding. Banks benefit by borrowing money for short periods of time - travelling as often as every night on a portion of their debt - to make long term to higher rates. That concern of their exposure to a sovereign default develops, European banks are paying more to borrow.
Doubt on banks can quickly become predictions worries of the depositors and lenders yank their money. Don't forget: Lehman Brothers goes O.K. in dead within a week in 2008, when hedge funds and other banks have concluded that the company could not pay its bills.
Indicators of stress on European banks have increased substantially since the middle of the summer. U.S. money market funds more great eight reduced to half their loans to German, French banks and the United Kingdom in the past 12 months and stopped funding Italian and Spanish banks, according to data compiled by Bloomberg. Some Italian banks are so desperate for the money they're selling bonds to retail customers for five times the interest they offer on savings accounts.
Quarterly financial statements are not fast enough to show what was going on. Smart money pays attention to market indicators to monitor health European banks on a daily basis - or even minute to minute. One of the premium banks pay for unsecured three-month loans one of the other vs superlow rate controlled by the Central Bank. That indicates a growing distrust between banks. Another is the price of credit default swaps - insurance that pays if a bank fails to pay its debts.
A mysterious but critical signs of distress is the cost of a swap "base" - a measure of how many European banks pay when they raise $ by exchanging debt denominated in euro for loans in dollars. The price of basis swaps increased 28 basis points (0.28 percentage points) of the value of deal mid-July 98 basis points on September 20. When the spread exceeds 150 basis points, "we are in the area of rupture of large European Bank," explained Conor Howell, head of Fund negotiated at the Capital's Christopher Street in London.
"There is a vicious circle," says the banker Yves-André Istel, a man of business and investment often speaks with senior officials of the Government in Europe. "The doubts are the banks draw their horns, which affect the real economy." As the real economy flattens out or, worse, of revenue for the sovereigns is put in question, and the cycle heads downward. »
Sovereign debt may be the underlying problem, but "the fuse is shorter on banks," so that they have to be supported immediately, said Istel, who is President Deputy goods luxury Swiss company Richemont and a Senior Advisor to the investment of the Rothschild Bank. He said that each nation must trigger a relief fund that would be available to invest in preferred shares and warrants of banks in this nation. They must recruit private investors to participate in funds, said Istel. The mere existence of the Fund could maintain confidence while work continues on a patch of sovereign debt, he argues. What say the indicators, it is that there is little time to lose.
The bottom line: The indicators of the nervousness of the investor on the health of European banks are near or above their highest levels since 2008.
With Yalman Onaran, Sarah Jones and James Sterngold Coy is editor of Bloomberg Businessweek economics.View the original article here
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