BIS sounds like Westy -g-
bis.org
"The swift reversal in market confidence evokes painful memories of autumn 2008, when the collapse of
Lehman Brothers brought money and capital markets to a virtual standstill. In both cases market
sentiment deteriorated rapidly around a trigger event, with problems in one region spreading globally
through the network of interbank funding markets and counterparty credit exposures. Volatility jumped,
and the prices of risky assets fell sharply as investors moved into perceived safe havens. In both
episodes, central banks provided exceptional funding liquidity, and government rescue packages were
subsequently announced with a view to restoring market confidence and stabilising the financial system.
While the broad outlines are similar, the Greek downgrade on 27 April and the subsequent
market reaction may have more in common with the start of the subprime crisis in July 2007 than
the collapse of Lehman Brothers in September 2008. That crisis began slowly with the disclosure of
mounting losses on subprime mortgages and the downgrade by rating agencies of a large number
of mortgage-backed CDOs. Similarly, emerging losses at several European banks were followed by
a widening of Libor-OIS spreads (Graph A, left-hand panel). Over the next few months, European
banks faced difficulties in funding their US dollar portfolios, as seen in the dislocation in crosscurrency
swap markets from September 2007 onwards (Graph A, centre panel). While equity prices
continued to rise up to mid-October, implied equity market volatility increased from July onwards, as
reflected in the upward trend of the VIX (Graph A, right-hand panel).
The current market stress has been associated with the same increase in equity volatility as in
the second half of 2007, but Libor-OIS spreads have moved up more slowly. Despite the recent rise
to around 30 basis points, three-month US dollar Libor-OIS spreads remain well below their levels
from August 2007 onwards. The current rise in the VIX initially followed the July 2007 trajectory, but
then jumped sharply, as it did in September 2008. While cross-currency basis swaps are signalling
difficulties for banks seeking to raise US dollars, the limited participation at US dollar auctions held
by the ECB, the Bank of England and the Swiss National Bank suggests that the problem is more
about counterparty credit risk than access to foreign currency funding. In contrast to July 2007, the
euro-US dollar basis swap began the recent period at a level suggesting that stress was already
present in cross-currency funding markets. The current departure point was similar to that of early
September 2008, but the spread has widened by much less this time in response to worsening
market conditions." |
