Tuesday, November 22, 2011

23/11/2011: Is there a run on the euro?

So let's ask that uncomfortable question: is there a run on the euro going on that is being carried out by ... the European banks? Or in other terms, have the European banks lost their fate in the invincibility of the Euro?

It appears to be quite possible, folks. Per Bloomberg report (here), 'foreign banks' deposits with the Federal Reserve have risen from USD350bn at the end of 2010 to USD715bn as of September 30. And per Bloomberg report, the number of foreign banks with deposits at the NY Fed in excess of USD1bullion rose from 22 at the end of 2010 to 47 at the end of September 2011.

And there is more: "demand for Treasury securities that mature in under a year has increased as financial institutions boost holdings of the highest-quality assets to meet new regulations set by the BIS in Basel, Switzerland. Bank holdings of Treasuries and government-related debt totalled a record of USD1.69 trillion at the end of October 2011, up from less than USD1.1 trillion in 2008," per Bloomberg.

More signs of a run on the euro: "Rates on 3mo [US Treasury] bills ended last week at zero, down from this year's high of 0.157% in February and 5% in mid-2007..." said Bloomberg report. This is linked in the report to the banks hoarding USD-denominated assets while dumping euro-denominated assets. And the price of 3mo cross-currency basis swaps (used by the banks to convert euro into USD) fell to the levels consistent with the spread of 132bps on euro interbank offered rate. In other words, the price of converting euro into dollars in the interbank markets is now the highest since December 2008.

And things are getting scarier - since the EU plans for bonds, more bonds and quasi-bonds announcement today, the US Treasuries shot through the roof. Today's sale of 5-year USD35bn US Treasury notes came in priced at a yield of 0.937% - the lowest on record. The cover was a hefty 3.15 - the highest since May 2011 and above 2.82 average cover in last four auctions.

This is not going all too well, is it? And then there's ZeroHedge piece on the run on European assets and banks from around the world (here).


Amidst all of this, it is ironic (or may be it is iconic) that just few weeks ago on September 26th (see link here), Mario Monti - or "Fool Monti" as I came to call him in a pun - stated:

"Oggi stiamo assistendo al grande successo dell'euro e la manifestazione più concreta di questo successo è la Grecia, costretta a dare peso alla cultura della stabilità con cui sta trasformando se stessa"
or translated:
"What we are witnessing currently is the great success of the euro, and its most solid demonstration is that of Greece, which is being compelled to adopt the culture of stability and transform itself".

Detached, clueless and in denial, even when appointed as 'technocrats', let alone elected, euro elites are really not a good example of the leaders we need.
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