Financail Crisis Redux 2.0
All of this talk of liquidity in the markets and confidence between banks sounds vaguely familiar:
Dollar Libor rates gauging stress within the interbank lending market have jumped to a 10-month high of 0.5363pc, with credit contagion spreading to every area. The iTraxx Senior financials index – banks’ “fear gauge” – rose 20 basis points on Tuesday to 184. “It turns out we weren’t seeing the light at the end of the tunnel after all, but a train with a big light on it coming towards us of double-dip,” said Dr Suki Mann, at Societe Generale.
While the Libor rate is still far below peaks reached during the Lehman crisis, the pattern has ominous echoes of credit market strains before the two big “pulses” of the credit crisis in August 2007 and September 2008. In each case a breakdown of trust in the interbank market was a harbinger of violent moves in equities and the real economy weeks later.
RBS’s credit team said Libor strains were worse than they looked since most banks in Europe were paying much higher spreads, especially in Spain. The “implied” forward spreads were nearer 1.1pc.
To me, there seems to be a lot of complacency here in the United States. The subprime mortgage crisis came around less than two years ago and destroyed much of Wall Street in its path, and took back hundreds of billions of dollars in equity from everyday Americans. And nobody seems to worry about a second wave of failing banks and the tenuousness of our economy and financial markets.
When the dominoes start falling in Europe, only a fool will think that the American market will be immune to the mess. We’re a global marketplace now, and the idiocy of our central bank, the Treausry and our political leaders will not change that fact.