Signs of Stress Grow at European Banks
By Peter Coy
Europe’s debt mess has been festering for so long it sometimes feels more like a chronic condition than a life-or-death crisis. But as negotiations to prevent a Greek default drag on, investors and lenders increasingly are concerned that a banking crisis could break out, dragging down the Continental economy before Greece even has a chance to default. On Sept. 21 the International Monetary Fund estimated that Europe’s banks face more than $400 billion in losses and said that weak banks need to raise capital quickly.
Also, one arcane but critical sign of distress is the cost of a “basis swap”—a measure of how much European banks pay when they raise dollars by trading eurodenominated loans for dollar loans. The price of basis swaps has risen from 28 basis points (0.28 percentage points) of the deal value in mid-July to 98 basis points on Sept. 20. When the spread exceeds 150 basis points, “we are in large European bank failure zone,” says Conor Howell, head of exchange-traded funds trading at Christopher Street Capital in London.
The bottom line: Indicators of investor nervousness about the health of European banks are near or above their highest levels since 2008.
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