Europe Still Falling Into the Abyss

So what’s the latest in Europe? Here’s the New York Times explaining their latest problems:

Now, another type of contagion is causing concern: the risk of problems spreading to big banks, especially in Italy and Spain….The banks own so many bonds issued by their home countries that they are being weakened as the value of those bonds falls, amid concerns that the cost of government borrowing could become too expensive for Italy and Spain to bear. Now there are signs that these concerns are, in turn, starting to make it harder and costlier for the banks to borrow money to finance their day-to-day operations, a troubling trend that, at the worst, could lead to liquidity problems.

Hmmm. Banks are having trouble funding themselves. Here’s the Wall Street Journal:

In Italy, one of the country’s biggest banks, UniCredit SpA, faced numerous questions from analysts about the bank’s short-term loans and whether disruptions in the funding market pose a threat. Executives acknowledged the market turmoil was having an impact, but downplayed its severity. “Liquidity…is available in the market. It’s very, very short [term], but available,” one senior executive said.

“Very, very” short term funding is all that’s available to UniCredit. When that happened to Lehman Brothers, it had about a week left to live. The overnight market can dry up — well, overnight if a bank’s solvency comes into question. The Washington Post tries to put this all into perspective:

The deepening woes raised the prospect of a crisis that would be almost as calamitous for the global economy as the one just avoided in Washington.

No no no. Europe is facing the prospect of a crisis that could be much more calamitous than our little debt ceiling kerfuffle. It might not happen in a week, but it’s sure starting to look like it might happen in a month or two. As usual, I hope I’m just being an underinformed worrywart, but one way or another, this shoe sure looks like it’s going to drop in pretty short order. Buckle up.

For more details, the Journal article is the best of the bunch. However, the Post has the best quote about Italy’s travails: “Berlusconi is more interested in his bunga-bunga parties than his bond market,” said Louise Cooper, a markets analyst at BGC Partners in London. And the Times has the best overall advice: “I don’t think anyone wants to be long European banks right now,” said Simon White, an analyst and partner at Variant Perception, a London-based research firm. Probably not.

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