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FT: Flight from money market funds exposed to EU banks

I don’t have much to add to this report as I have already outlined this as an issue creating concern. The fact that this withdrawal of liquidity has already begun, though, does make the situation more acute.

The FT writes:

Investors are withdrawing cash from money market funds heavily exposed to short-term debt issued by European banks out of fear that a Greek default could spark contagion across the region’s financial sector.

At the same time there is increasing reluctance among US banks to lend to their European counterparts in the past two weeks because of growing worries over Greece, according to brokers and bank traders.

You know, scratch that. Let me quote from last May’s post on BBVA’s problems in the US commercial paper market:

The Wall Street Journal is reporting that the Spanish bank Banco Bilbao Vizcaya Argentaria (BBVA) is having a difficult time funding itself in the US commercial paper market. Moreover, according to the Journal this has been going on for some time – since the beginning of the month. The amount is small ($1 billion) given BBVA’s large balance sheet which is almost $700 billion, the same as when the crisis started in 2007. And BBVA is widely seen, along with Banco Santander, as the healthiest institution in Spanish banking. Their having problems rolling over paper speaks to the panic of CP buyers, in my view. But the commercial paper market has also been a major source of bank runs since the credit crisis began and this has to be seen by authorities in the US and Europe as a signal of liquidity problems…

What do I make of this? For starters, I don’t think it is entirely rational because the two entities I identified are the strongest in their respective markets. These stories have all the hallmark of panic. Yet, it speaks to a certain Eurozone debt revulsion that is now widespread.

-European Contagion Spreads; Is This Rational?

The question is what to do about it. In my view, the right way to deal with this is transparency, stronger capital structures, and more differential treatment of solvent and insolvent institutions, not bailouts. It seems to me that the present path is not instilling a sense of confidence in investors.

Here’s the link: Flight from money market funds exposed to EU banks – FT

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

1 Comment

  1. Anonymous says:

    Yes your solution is practical, but I doubt that it will be done in time if ever. The banks have been lobbying against any toughening of capital requirements and the deadline is still years away. That will not be good enough for next week when Greece either defaults or just delays the default a few more months. Increased capital requirements reduces the profitablity of the bank. Transparency will also reduce profits as others can see what they are up to and will cost them more to deal. Though considering the central banks must have thrown hundreds of billions into the banks and they are still vulnerable to a sovereign default shows that they probably were insolvent at the time of the first big bail out. Ultimately banks should not lend across borders as this is where all the problems occur. It would have stopped problems of Ireland, Iceland, Portugal, Spain, Greece, Germany, Netherlands, Belgium, Denmark, UK, US and Australia. Some of these problems still have to impact but they are there. 

  2. DavidLazarusUK says:

    Yes your solution is practical, but I doubt that it will be done in time if ever. The banks have been lobbying against any toughening of capital requirements and the deadline is still years away. That will not be good enough for next week when Greece either defaults or just delays the default a few more months. Increased capital requirements reduces the profitablity of the bank. Transparency will also reduce profits as others can see what they are up to and will cost them more to deal. Though considering the central banks must have thrown hundreds of billions into the banks and they are still vulnerable to a sovereign default shows that they probably were insolvent at the time of the first big bail out. Ultimately banks should not lend across borders as this is where all the problems occur. It would have stopped problems of Ireland, Iceland, Portugal, Spain, Greece, Germany, Netherlands, Belgium, Denmark, UK, US and Australia. Some of these problems still have to impact but they are there.