Banking crisis set to trigger new credit crunch

October 4, 2011 by · Leave a Comment
Filed under: Global News 

Interesting article.  I keep reading this articles about European banks and get deja-vu from our last financial crisis that we supposedly made through.   But, just as I said after all the “experts” said all is clear, we were never out of the woods.

One of the key indicators to watch it the inter-bank lending market.  These are the rates bank charge each other for borrowing money.    The lower the rate, the most trust in this market and hence, between banks.   When banks don’t trust each other, you have serious problems because they know much more about each others liability positions then almost anyone else.  Also you can look at the spread between what the central bank authority charges a bank for over-night loans and what the inter-bank lending rate is.    The wider this spread, shows the deterioration of trust between the banks.

We were never out of the woods and we are getting close to another crisis.   All it will take is another external shock and we will have markets react sharply and that will trigger other events that will culminate in large banks either failing or being given assistance to stay afloat.   The right thing to do “this” time around is too LET THEM FAIL.   We have to let these debts default so they do not become a burden on the lending market or the public in general.  They made the money on the way up and now they need to take the losses on the way down and the banks that were smart enough to protect themselves will prosper and naturally become larger and make more profits.

The Telegraph (Harry Wilson) – Credit default swaps on lenders as far afield as China and Australia, countries that until recently seemed immune to the chaos, have doubled in the last two months to levels not seen since the financial crisis.

In Europe, French and Belgian government officials are due to meet on Monday to discuss the crisis enveloping Dexia as speculation mounts about a possible break-up of the Franco-Belgian lender.  Last week, the cost of insuring Dexia bonds hit an all-time high of 900 basis points, nearly double the level just two months ago, meaning the annual cost to insure €10m (£8.59m) of the bonds is £900,000.

“The money ran out in June and what you are seeing now is the beginning of a new credit crunch, except this time it will be truly global, not Western,” said one senior London-based credit analyst.  Dexia, along with other European lenders, has been hard hit by the closure of the interbank lending markets and the continuing unwillingness of investors to buy the bonds of eurozone banks.

“Nothing is really working at the moment. None of the markets are functioning. Until Greece defaults it’s hard to see any resolution,” said one senior London-based credit analyst.

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