Credit Stress

Guest Post by Macro Story.

The goal of the globally coordinated central bank intervention two weeks prior was to improve access to USD based funding, restore confidence and get the system functioning normal again.

The following anecdotal evidence is clear these goals have not been achieved.

Fed Foreign Held Reverse Repo Balance

The weekly balance of $90 billion remains at 2008 levels and up from $82.5 billion the prior week. This is a reduction interbank lending to those debtors in need of US based capital. This reduces the “supply” of USD contributing to the supply demand imbalance.

Euro Basis Swap Rate

The demand for USD continues as measured by the EUR basis swap rate. The Fed USD swap lines are being used yet it is failing to alleviate the demand which is causing the USD to rise.

Confidence Is Not Being Restored

A large source of short term bank financing is through US Money Market funds yet according to a recent FT article investors are pulling such capital out of Europe. From the FT.

“The biggest US money market funds have cut their lending to European banks to another record low while increasing their holdings of US government debt to levels reminiscent of those seen during the financial crisis.

The 10 largest funds trimmed their short-term lending to European banks by 4 per cent on a US dollar basis between the end of November and the end of October, according to new data from Fitch Ratings

That takes money market funds’ European bank exposure to a fresh low of about a third of their total assets of $645bn, down from 34.9 per cent at the end of October.

These shifts in exposure serve as a reminder of the potential volatility of short-term wholesale funding,” said Fitch’s Martin Hansen. “Banks have to access new sources of dollar funding or deleverage their dollar-based lending and financial activities.”