This weekend OneEurope received an article which we hope will trigger a debate on status quo, or as the author claims, the end of the European financial crisis.
The author (a banker who wishes to remain anonymous) claims that the acute financial crisis in Europe is over and provides evidence, which points to the resolution of the crisis in the coming weeks.
The Financial Crisis is Over
Early last year the Euro area faced a huge financing problem – both the peripheral sovereign borrowers and the majority of European banks had to either raise financing at very high costs, or were unable to find financing at all. To prevent a funding crunch the European Central Bank announced two long-term (3-year) repo operations (LTROs), through which banks were able to borrow unlimited amounts of money for a period of up to 3 years. European banks borrowed around EUR1trillion during the two loan programs in December 2011 and January 2012.
These LTROs will not mature for another 2 years, but the ECB allows banks to repay them early. And this is exactly what is about to happen in the coming weeks as market funding conditions have improved - the European banks are now able to fund themselves on the international bond and/or FRN markets at costs lower than the ECB money, as also observable by the falling borrowing from the 1-month STRO and 3-month LTROs (Charts 1 and 2).
Germany's Commerzbank AG has officially confirmed its intentions to repay part of the LTRO money this month and it is expected within the inner circles of banking and finance that the two large French banks BNP Paribas and Societe General will begin repaying part of the loans as well.
Lloyds Bank, Britain’s second largest bank, plans to repay most of the GBP11.4bn of 3-year loan it has borrowed from the ECB. Market estimates suggest from EUR100-to-150bn will be repaid next week, and this is already leading to stronger EUR and lower Euribor rates.
The stress on the sovereign financing side has also fallen sharply as peripheral Euro countries are beginning to regain access to the long-term debt markets. Ireland in early January and just this week Portugal sold bonds successfully after almost two years absence from the long-term capital markets. Portugal sold EUR2.5bn of 5-year bond at 4.9% yield – the first sale in almost two years, while the 10-year bond yield fell below 6% for the first time since 2010. The yields on the Italian and Spanish 10-year sovereign bonds have fallen from over 7% and 7.5% in early-mid 2012 to 4 and 5% resp. at present. The CDS levels have also fallen to almost pre-crisis level.
Table: Selected Euro sovereign 5 year CDS historic spread (2010-2013, bps)
Is the European financial crisis over? The acute financial stress is over. Many signs point in the right direction - the direction that was brought by the actions of Chancellor Merkel, PM Monti and the President of the ECB Draghi.
The hard work for the Euro area, however, is only starting now. How can we have more Europe, not less? How can we build consensus around European federalism and fiscal responsibilities? And how can we bring economic and employment growth back (, especially youth employment). And ultimately, how can we sustain the European socio-economic model which makes Europe an example for the rest of the world?
For articles, opinions, analysis and discussions on the Eurocrisis, check out our debate: Solving the Eurocrisis
For content and discussions on tackling youth unemployment, see the debate: Fighting Unemployment Across the Continent
For articles and debates on the further fiscal and political unity in Europe, see: European Integration