Pressure Rises For European Finance

Pressure Rises For European Finance

almost 4 years ago2 mins

A key early indicator of stress in the European banking system has hit its highest level in eight years – leading to worries that the rising cost of short-term borrowing could signal a “credit crunch” coming later this year 😬

What does this mean?

In March, investors were concerned about a widening US “FRA-OIS spread”: the difference between the interest rate at which banks borrow money from each other for three months and the official “risk-free” rate for lending it overnight. But while unprecedented financial stimulus has cooled down the dollar-based barometer of banks’ short-term funding costs, its European equivalent has now increased sevenfold since February.

The EURIBOR-OIS spread is still well below 2008 crisis levels (Source: IFR/Refinitiv)
The EURIBOR-OIS spread is still well below 2008 crisis levels (Source: IFR/Refinitiv)

Financial institutions are demanding a higher relative rate when borrowing euros from each other due to the growing risk that coronavirus leads to many companies failing to repay their own bank loans.

With European Union leaders still debating next steps in the bloc’s economic response, investors are torn as to whether lending markets there will fall back in line with America – or whether bank liquidity could instead dry up, causing a European credit crunch of the sort seen in 2007-08 😢

Why should I care?

Banks including HSBC and UBS worry that the additional €200 billion-plus eurozone governments plan to borrow this year might cause the spread to widen further – potentially making it harder for financial institutions to lower the interest rates at which retail customers borrow money.

First-quarter economic growth figures out later this week will offer another early insight into the impact of the coronavirus crisis. But while investors expect the eurozone economy to have shrunk by 2.2%, a 3.7% decline is predicted for the US. Billionaire investor Carl Icahn certainly isn’t hopeful: he warned late Friday that US stocks remain overvalued – and the major “mall short” bet he made last year against retail centers’ success continues to deliver.

The CMBX 6 commercial real estate index falls when malls default on loans (Source: Bloomberg)
The CMBX 6 commercial real estate index falls when malls default on loans (Source: Bloomberg)

Still, not every investment is having a bad time of it: avocado prices have risen 60% since early March... 🥑

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