What former Bundesbank President Karl-Otto Poehl actually told Der Spiegel on Friday was that the purpose of the bailout was to avoid losses “for German, but especially for French banks.” A watered-down account of Poehl’s interview appeared May 16 in the WSJ’s finance blog.
Der Spiegel interviewed Poehl on its main German-language site May 15. I translate:
Poehl would have preferred that Greece’s creditors take a loss on some of their claims. He does not belief that this step would have led to domino effects against another countries. In fact, it was all done this way “to protect German, but above all French banks from write-downs.”
Them’s fighting words, especially when some European banks can’t fund themselves on the interbank market, as Bloomberg wrote this morning:
Royal Bank of Scotland Group Plc andBarclays Plc led financial firms punished by rising borrowing costs, British Bankers’ Association data show. The cost to hedge against losses on European bank bonds is 63 percent higher than a month ago. Investment-grade corporate debt sales in the region plummeted 88 percent last week to $1.2 billion from the previous period, according to data compiled by Bloomberg.
The rate banks say they charge each other for three-month loans in dollars rose to a nine-month high, even after a government-led rescue designed to prevent Greece from defaulting, and a new financial crisis. The euro fell to its weakest against the dollar since 2006.
Bank lending “conveys a lack of trust in the system,” said Robert Baur, chief global economist at Des Moines, Iowa- based Principal Global Investors, which manages $222 billion. “Banks are a little reluctant to lend overnight as they don’t know the full extent of what is on the bank balance sheets.”
The three-month London interbank offered rate in dollars, or Libor, climbed to 0.46 percent today, the highest since Aug. 7, from 0.445 percent on May 14 and 0.252 at the end of February, according to the British Bankers’ Association. The three-month Singapore interbank offered rate, or Sibor, rose to 0.45083 percent, also the highest level in nine months, according to the city state’s Association of Banks.
‘Access Spotty’
Concerns have spilled into the market for commercial paper, debt used by companies and banks for their short-term operating needs. Rates on 90-day paper are more than double the upper band of the federal funds rate, about twice the average in the five years before credit markets seized up in mid-2007.
“The list of banks able to tap the three-month market remains extremely limited with access spotty and expensive,” Joseph Abate, a money-market strategist at Barclays in New York, wrote in a May 14 note to clients.
The interbank market is the circulatory system of world finance, and trouble there is the definition of systemic risk. This ain’t over by a long shot, and Poehl’s objection to an indirect bailout of French banks shows how unstable the Euro-consensus actually is.
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