Europe – “Sorry. That is a bad address”

Two important articles today on the gnarly topic of liquidity in Europe.

The first from Zero Hedge. This looks at a report out from Morgan Stanley on the status of Euro banks and the issuance of LONG-TERM debt. The bottom line is that as of August there is no long-term debt market for the EU financials.

NOTE: This is not T. Durden talking. This is the white spats boys @MS. When “The mother of all cheerleaders” starts writing stuff like this; it is worth noting.

Next from FTAlphaville who comments on a Fitch report Re: US money market funds draining cash from European banks. This was a July data report. Things have gotten much worse since then. The July data scared the crap out of (even) me.

It has been well know that the MMFs were leaving the weaker countries in the EU. What is scary to note however is that the money funds are leaving Germany too. The largest month over month decline came from German banks. Shocking!; is my reaction. Essentially the MMFs are saying, “NO EUROPE”.

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There is some evidence in the money markets of what is going on behind the scenes. Libor rates for Euros and dollars are elevated. The forward currency swap spreads are also evidencing a tightness in the dollar funding market. That said, I don't see the evidence on my screen that we are at a bend point in this story. I think the quoted prices are not where real business is getting done.

The interbank deposit rates that are the basis of the quoted pricing may well be the rate that a Citi does business with a Chase. But these quotes have nothing to with the rates that a Banca Nazionale del Lavoro is currently paying for cash money.

I believe that a number of the big liquidity providers to EU banks are charging a big premium for money these days. I'm sure that there is growing list of EU financials that are looking for money and finding that their traditional providers are no saying:

  “Sorry, I’m full up on your name today”.

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Note: On that title I used today; a side story.

At one point long ago I found myself in the position of being long an FX cash position with a London based French bank. On the other side of this was a short futures position with a street broker by the name of Refco.

There are only two ways out of this situation. One has to either (1) unwind the futures and also the cash or (2) try to do a “give up” of the cash position to the broker. (netting).

This was a several billion dollar position. More often than not the unwind approach costs money (the futures market is very smart at spotting this type of stuff). So I asked the French bank if they would do the wash trade with Refco. (Note: this is very common stuff)

I recall the exact response that was given (with a heavy French accent).

“I’m sorry, that is a bad address.”

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At first I didn’t get it. The wording was not the usual, “We don’t take that name”. But it did mean the same thing. The French bank simple would not do business with Refco. I undid the position(s), and it cost me. The "Bad Address" thing stuck with me.

One side note to the story is that on 10/10/2005 Refco was busted for lying to the public. Refco claimed to have a $530mm IOU on the books. Actually, it was worthless. Refco went Chapter 11 a few days later. Phil Bennet, the Refco CEO went to the slammer for 16 years.

The other side note is; Europe is becoming a “Bad Address”.

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