Short-term funding markets were next to dry up. Hardest hit were European banks that need dollars to finance world trade . American money market funds, in particular, have pulled back from Europe. Loans to French banks have plunged 69% since the end of May and nearly 20% over the past month alone, according to Fitch, a ratings agency. Over the past six months, it reckons, American money market funds have pulled 42% of their money out of European banks. European money market funds, too, continue to reduce their exposure to France, Italy and Spain, according to the latest numbers from Fitch.
Interbank markets, in which banks lend to one another, are now also showing signs of severe strain. Banks based in London are paying the highest rate on three month loans since 2009 . Banks are also depositing cash with the ECB for a paltry, but risk-free rate instead of making loans.
That leaves retail and commercial deposits, and even these may have begun to slip away. We are starting to witness signs that corporates are withdrawing deposits from banks in Spain, Italy, France and Belgium, an anlayst at Citi Group wrote in a recent report. This is a worrying development.
With funding ever harder to come by, banks are resorting to the financial industrys equivalent of a pawn broker: parking assets on repo markets or at the central bank to get cash. We have no alternative to deposits and the ECB, says a senior executive at one European bank.
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2016-02-26
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