European data was looking ok last night right up until the ZEW:
The cost of insuring European bank debt against default rose to a record as German investor confidence fell to the lowest in more than 2 1/2 years on concern the region’s debt crisis will curb growth.
The Markit iTraxx Financial Index of credit-default swaps linked to the senior debt of 25 European banks and insurers increased 7 basis points to 257, according to JPMorgan Chase & Co. at 1 p.m. in London. The Markit iTraxx SovX Western Europe Index linked to 15 governments widened 5 basis points to 302, approaching the record 306 on July 18.
Confidence is waning as more than $8 trillion was wiped off global stock values over the past four weeks. European services and manufacturing growth held at the slowest pace in almost two years in August, adding to signs the euro-region recovery is losing momentum.
“Investors are worried that during times of quickly deteriorating asset prices, high volatility, and rising risks to the economic recovery, banks could be left with too little capital and a potential lack of support since governments are constrained by high indebtedness,” Christian Weber, a strategist at UniCredit SpA in Munich, wrote in a note.
The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict developments six months in advance, dropped to minus 37.6 from minus 15.1 in July. That’s the lowest since December 2008. Economists expected a decline to minus 26, according to the median of 36 estimates in a Bloomberg News survey.
So once again we are back to questioning the viability of the European banking system which looks increasingly worse by the day:
The signs of distress are widespread and mounting: Banks deposited 128.7 billion euros ($186 billion) overnight with the ECB yesterday, more than three times this year’s average, rather than lend the money to other firms. Banks also borrowed 555 million euros from the Frankfurt-based ECB’s overnight marginal lending facility, up from 90 million euros the day before.
European bank stocks have sunk 20 percent this month, led by Royal Bank of Scotland Group Plc (RBS) and Societe Generale (GLE) SA. Edinburgh-based RBS, Britain’s biggest government-controlled lender, has tumbled 43 percent, and Paris-based Societe Generale, France’s second-largest bank, dropped 39 percent.
The extra yield investors demand to buy bank bonds instead of benchmark government debt surged to 302 basis points yesterday, or 3.02 percentage points, the highest since July 2009, data compiled by Bank of America Merrill Lynch show. The cost of insuring that debt against default surged to a record today. The Markit iTraxx Financial Index linked to senior debt of 25 European banks and insurers rose to 252 basis points, compared with 149 when Lehman collapsed.
And let’s not forget the on-going FX liquidity issues the European banks are having as $US investors decide it is best to keep their money at home. We are also seeing greater concern for the most prudent nations as their bail-in clauses on subordinate debt make their liquidity issues even worse:
Lenders such as Spar Nord Bank A/S, Denmark’s fourth- biggest listed bank, are now dumping assets to generate cash in the absence of market demand for their bonds.
“These kinds of funding tools are closed at this point,” said Thomas Hovard, chief analyst for corporate bonds at Danske Bank A/S, in a phone interview. “The international situation makes almost anything impossible in terms of senior debt, and the Danish banks have their own challenges.”
It would be well known to my readers that the current banking crisis is just yet another symptom of the broken macroeconomic model of Europe. The fundamental issue is competitiveness imbalances across the single currency nations and unless this key issue is being dealt with then all others are simply a side show.
It seems that the European investment community are finally waking up to the realisation that the Euro-elite’s failing leadership means nothing is going to be done about it:
“Poor relations between Merkel and Sarkozy are one of the big problems of dealing with the debt crisis because it’s up to European Union leaders to handle this,” Erixon said. “It’s not a personal relationship that can deliver grand things because the trust isn’t there.”
Their response last week to investor pleas for a new approach — such as backing euro-area bonds or a bulked-up bailout fund — highlighted a lack of leadership in Europe, say investors and analysts. Their joint statement after a meeting in Paris Aug. 16 deepened a slide in global stocks as they rejected collective borrowing and emphasized the need for responsible budgeting. The cost of insuring European bank debt rose to a record yesterday and has exceeded the 2009 peak in the wake of Lehman Brothers Holdings Inc.’s collapse.
They were “as far away from reality as they ever have been throughout the year-long European sovereign debt crisis,” Howard Wheeldon, senior strategist in London at the brokerage BGC Partners, wrote in an Aug. 17 note to investors.
That’s about how I read it.