Europe's Liquidity Crunch Intensifies

The drama regarding Greece's imminent default is already having wide ranging consequences for Europe's insolvent banking system. Fears of massive disruptions in the European inter-bank funding market has all of the major banks scrambling for as much liquidity as they can get while it is still available.

The ECB reported allotted EUR186.942 billion worth of seven-day funds in its main weekly refinancing operation---about EUR 51 billion more than in last week's MRO, when it allotted EUR135.585 billion. The demand for liquidity was so high that it exceeded the ECB's own estimate of EUR 102.5 billion. Can you say liquidity crunch?

More importantly, the number of bidders at the weekly operation surged to 353 from 235 one week earlier. I bet this was due to PIIG banks who cannot get financing anywhere, outside of the ECB.

This type of action shows how desperate the EU banking system is for cash as banks reduce their lending to each other on Greek contagion risk fears. Earlier this week, it was reported that major banks like Barclays were dramatically reducing their exposure to other European banks. So with the inter-bank funding market drying up, the weakest banks are becoming heavily reliant on free ECB money to finance operations.

Black Swan Insights 


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