Saturday, July 17, 2010

Spain & the EURibor

A few days ago I put in the order to sell the euro; the drastic move the other way prompted me to take a closer look at what happened, and I think I've found out why. In our own economic crisis of September 2008, the one thing that prompted our leaders to act ($700 billion bailout) was the freezing up of the credit markets. The LIBOR (London Interbank Offer Rate) is the interest rate at which banks will lend to each other; when this skyrockets, it's a sign that banks are not trusting each other and for the most part won't lend to one another unless it's at extremely high rates.. it's a very good measure of banking stress. Europe has their own such market.. it's called the EURibor, and it does the same thing. When the LIBOR's go up, since there are fewer and fewer loans, there is less and less currency circulating in the system, and the value of the currency goes up relative to the amount of goods. Remember $1.99 gas in October 2008 anyone ? This is called deflation.. and while most of us would cheer for $1.99 gas again, the flip side of deflation is that consumers can't get loans to consume and businesses can't get loans to produce.. ie.. a slow constriction of the economy. Without further adieu.. I present to you the EURibor chart:

In doing a little bit more digging, I came up with what I think is a reason why: "Spanish banks borrowed a record 126.3 billion euros ($161 billion) from the European Central Bank in June. This represents a 48 percent increase from the €85.6 billion borrowed in May": . In other words, absolutely nobody is loaning anything to Spanish banks except for the European Central Bank. As I understand it, Greek and Portuguese banks are in roughly the same shape. It's just this sort of distrust that froze up our own credit markets in the Lehman era and led to our own $700 billion bailout.

Of late, European government bonds have seen their rates stabilize and their CDS rates come down.. a very welcome sign. But not all is well yet; this little tidbit came in last Wednesday: "The just completed auction of Spanish 2025 Obligacions for just under €3 billion, came at a 5.116% yield, a substantially worse level than the last auction as of April 22, which was placed at 4.434%" . This means that while people are willing to the Spanish Gov't money, they want a serious premium to do so. The US does not issue 15 year bonds; but we do have a ten year bond; the rate on it was 2.92%, thus giving you some idea as to where Spain stands in the international bond markets.. and it's about half way between the woodshed and the outhouse. An encouraging note here however: China seems to have stepped in and bought an abnormally large share of Spanish bonds.

These two things speak to the fact that Spain is very far from out of the woods.. and this is a nation who's unemployment rate is already 20%. The Socialist government has tightened the belt some, but any more budget and wage cuts will begin to test the patience of the people. While we are not at the Rubicon as yet, we are approaching it slowly. I would not be surprised to see Ben Bernanke step in and help in one fashion or another; outright purchases of Spanish and other government bonds would ease rates and would help the deflation that is gaining momentum here. Spain's step by step slide is going to have to be addressed. The ECB, EU and IMF all saw it coming.. here's my from last month on this: "The last time the IMF sent a delegation to a country was on April 15th when the IMF together with representatives from the EU and ECB took a jaunt over to Athens. A month later the country was insolvent" :


  1. Is it actually right to read a EURIBOR of 0.86% as indicating nervousness and a drying up of credit? On the one hand it is a big percentage rise from the 0.65% bottom in the chart you link to, so it might seem so. And yet if it really is an increased risk premium due to the possibility of default it is only another 20-ish basis points. I would think that if I were worried about loaning money to Spanish banks of dubious solvency, I wouldn't be looking for 10 or 20 or 30 basis points extra yield in order to make up for the default risk. Rather, an additional risk premium like 10 or 20 or 30 percent (i.e. a hundred times more!) are the sort of figure that might seem to make sense.


  2. Daniel: If you're talking about the Euribor, realize that it's a EU wide indicator; I'm sure that German and Danish banks find getting loans much easier than do Greek or Spanish. As a whole, even during the Lehman era it did'nt get above 1.75%.. and when it gets even that high there effectively ceases to be any interbank lending. "Spanish banks borrowed a record 126.3 billion euros ($161 billion) from the European Central Bank in June. This represents a 48 percent increase from the €85.6 billion borrowed in May".. this is because nobody else is willing to do so.

  3. I want to believe you're right because it would make it easier to sleep at night, but unfortunately there's this from Ambrose Evans-Pritchard of the UK Daily Telegraph

    Fed's volte face sends the dollar tumbling

    Rarely before have a few coded words in the minutes of the US Federal Reserve caused such an upheaval in the global currency system, or such a sudden flight from the dollar.

  4. "...absolutely nobody is loaning anything to Spanish banks except for the European Central Bank"
    - - - - - - - - - - -
    Nobody would loan anything to GM except the FED, with the Govt. bailout money.

    First the US, and now Europe. History may not repeat itself, but it sure rhymes.

  5. JF: Today there was a rumor the Fed was going to stop paying the 0.25% interest on deposits made at the Fed; it's designed to get banks loaning again. The banks and businesses do have money, but are simply not lending to anyone that does'nt have "Guaranteed by the US Government" in the contract. IMHO there is the beginnings of deflation in the US; the M3 numbers are slumping (though the M2 numbers have remained relatively stable for a year or so). But then there's this: ""The latest consumer credit number continues the decline we have seen in recent months, plunging from $2424.4 billion in April to $2415.3 billion in May, a $9.1 billion decline, or 4.5% annualized, on consensus of $2.3 billion. Yet the biggest stunner was the April revision which was whacked from +$1 billion to a revised -$14.9 billion. In other words, there has been a $24 billion decline in consumer credit in the past two months" This is called money velocity, and for whatever reason it's slumping, as is the amount of credit available to both consumers and businesses. Bernanke absolutely hates this.