Concerns Over New 2008-Style Credit Crisis Mouting, Especially From Europe
CNBCPockets of Debt Illiquidity Show Rising Bank Fears
...One sign of worry is the increasing reluctance of banks to use their balance sheets to facilitate trades, which has hit sectors from corporate bonds to the short-term repurchase market, where there is $1.6 trillion in triparty loans.
For example, banks have reduced activity in the intra-dealer Treasury repurchase agreement market by 63 percent since the end of June, according to Barclays Capital.
To some, this spreading risk aversion suggests that an autumn of troubling headlines could again spark a freeze like the 2008 crisis. There is no shortage of potential flash points, from Europe's debt crisis to a weak U.S. economy.
"I think the markets are going to get very stressed," said Abdullah Karatash, head of U.S. fixed income credit trading at Natixis in New York.
"All this uncertainty could just lead to a big leg lower in stocks and when that happens bank financial stocks are going to lead the way lower," he said. "It's gonna hurt their balance sheet and that's going to further hurt the liquidity picture."
Large money funds have been pulling back on making unsecured loans to European banks, and instead moving to secured transactions. This has left the banks scrambling for dollar-based funding and, in one rare case, led a bank to tap a liquidity line at the European Central Bank...
"This could be Europe's 2008. That's probably the major concern for the market, what does that mean for the ripple effect on our capital markets and globally," said Mikelic.
A CDS index based on of 25 European financials is also reflecting elevated concerns over their credit quality.
The index traded on Tuesday at 242 basis points, just under last week's record 260 basis points and much higher than the 210 basis point peak reached at the height of the financial crisis, according to data by Markit...
...One sign of worry is the increasing reluctance of banks to use their balance sheets to facilitate trades, which has hit sectors from corporate bonds to the short-term repurchase market, where there is $1.6 trillion in triparty loans.
For example, banks have reduced activity in the intra-dealer Treasury repurchase agreement market by 63 percent since the end of June, according to Barclays Capital.
To some, this spreading risk aversion suggests that an autumn of troubling headlines could again spark a freeze like the 2008 crisis. There is no shortage of potential flash points, from Europe's debt crisis to a weak U.S. economy.
"I think the markets are going to get very stressed," said Abdullah Karatash, head of U.S. fixed income credit trading at Natixis in New York.
"All this uncertainty could just lead to a big leg lower in stocks and when that happens bank financial stocks are going to lead the way lower," he said. "It's gonna hurt their balance sheet and that's going to further hurt the liquidity picture."
Large money funds have been pulling back on making unsecured loans to European banks, and instead moving to secured transactions. This has left the banks scrambling for dollar-based funding and, in one rare case, led a bank to tap a liquidity line at the European Central Bank...
"This could be Europe's 2008. That's probably the major concern for the market, what does that mean for the ripple effect on our capital markets and globally," said Mikelic.
A CDS index based on of 25 European financials is also reflecting elevated concerns over their credit quality.
The index traded on Tuesday at 242 basis points, just under last week's record 260 basis points and much higher than the 210 basis point peak reached at the height of the financial crisis, according to data by Markit...