We follow the LOIS spread which is the Euribor - overnight interest rate swap spread. Market in Euro LOIS has exploded since the beginning of the month. There is significant risk with EU financial institutions.
This financial risk is even greater than the Greece, Ireland, Portugal problem. Of course, this are not a separate financial problem. The banks hold the paper that has fallen in value even if we do not admit it and the capital hit has not been taken. This bank investment will not be able to be turned over to invest in any other capital projects so its presence on the balance sheet restricts the future availability of capital available for lending. The lans will not be paid in full. If we actually took a capital haircut on these assets, there will be a significant decline in bank capital. Leverage to other institutions would have to decrease and financial intermediation would decline.
There is potential for bank failure so governments may have to intervene. the effect is an increase in funding costs and a risk premium for EU financial institutions which will decrease profits. There is a reason the euro has not increased even with the US economic problems.
No comments:
Post a Comment