The finger pointing and general liquidity drain in the European banking sector seems eerily similar to the post Lehman debacle of 2008. In fact, if we look at the Euro swap spread at the 10 year point, or the longer term credit risk perceived between European banks we can actually see levels that are only matched by the post Lehman crisis:
- European Swap Spreads have Blown Out while US Swap spreads remain muted
There has been significant credit widening in the longer term European intra-bank credit risk premium, but the true sign of bank stress is in short term liquidity. Despite headlines comparing the current fear to that of 2008, we are no where near the liquidity stress levels of that crisis. The 3 month Euribor-OIS spread (short-term willingness of banks to lend to each other) has widened, but it remains significantly subdued compared to October of 2008:
The problem is that you only need one big event to send this fear into hyper-gear. The latest deja-vu comes from today’s BNP Paribas press release:
The Wall Street Journal published today in its Op-Ed pages an article entitled “The problem with French banks” written by Mr. Nicolas Lecaussin.
This article quotes a certain anonymous BNP Paribas executive who states that the bank has a liquidity problem in dollars and is participating in the creation of a market in euros to solve the problem.
BNP Paribas categorically denies the statements made by this anonymous source and confirms that it is fully able to obtain USD funding in the normal course of business, either directly or through swaps.
BNP Paribas is surprised that the Wall Street Journal published this opinion containing both statements from an anonymous source, and a large number of unverified assertions and technical errors, without contacting the bank for verification.
Let us take a step back in time to March 10, 2008 when Bear Stearns released the following press release:
“There is absolutely no truth to the rumors of liquidity problems that circulated today in the market.”
By March 14th, Bear Stearns announced that it had received $30B in funding by JP Morgan that was backstopped by the government.
