Nikhil Kumar: The tell-tale signs that a second credit crunch may be on the cards

 

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The Independent Online

It is notoriously difficult to accurately explain the ups and downs, but one of the key factors underlying the volatility on global stock markets over the past week has been some alarming moves in the indicators that flashed red during the credit crunch. And though those indicators may not yet be back in the danger zone, some have begun to turn a worrying shade of pink in recent days.

Take the money markets, the well of liquidity that banks depend on every day for funding. Although far healthier now than they were in 2008, funding appears to be deteriorating. And yesterday's official data showed that the level of emergency overnight funds that lenders borrow from the European Central Bank has jumped to its highest level since the middle of May.

In all, banks took more than €4bn (£2.4bn) in overnight funds from the ECB. This money comes at a cost. Banks have to pay 2.25 per cent for the cash, significantly more than the 1.5 per cent interest rate which is attached to regular ECB funding.

However, while the ECB data did cause some concern, traders warned against reading too much into the figures, as they may have been a one-off. Lenders, they said, may well have sought overnight funds to tide themselves over ahead of the release of six month money, the ECB has promised to make available; real stress will be apparent only if the overnight number remains consistently high – something that hasn't happened yet.

Dealers are also keeping tabs on the difference between the overnight lending rates set by central banks and the rate at which banks lend to each other. This difference, or spread – an indicator of the reluctance to lend among banks – has been creeping up of late, and now stands at its highest since the first half of 2009. Again, the spread remains well below the levels seen in late 2008, when lending channels virtually dried up amid fears of an economic and banking sector collapse, but the uptick does signify an onset of fear.

Another pointer is the cost of insuring five-year debt issued by banks via credit default swaps.

The concerns surrounding European lenders have focused minds on the swaps for French and Italian banks, which have climbed in recent months, according to figures from the data provider Markit.

For Société Générale, for instance, they climbed to more than 340 basis points yesterday, up from 135 at the start of June and around 150 in early January. The BNP Paribas credit default swap stood at around 236 basis points, up from 109 at the start of June, while in Italy, the Unicredit swap rose to 382 basis points yesterday, up from 170 at the start of June. At the same time, the cost of insuring sovereign debt against default has also been rising, signalling increasing concerns about a default.

The credit default swap for Italy, for example, stood at 365 basis points yesterday, meaning that the annual cost of insuring $10m in five-year Italian debt stood at $365,000. That was up from 160 at the start of June. Looking across the Mediterranean, it cost the same to insure an equivalent amount of Spanish debt yesterday.

Given the increasing focus on France, the annual cost of insuring $10m in five-year debt issued by Paris stood at $168,000, up from $72,000 back in June.

The US credit default swap, on the other hand, stood at 54 basis points yesterday, despite the recent rating downgrade by Standard & Poor's, which stripped the world's largest economy of its 'AAA' standing last week.

For the UK, the figure was 89, well below France, Italy or Spain, but slightly above Germany.

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