Short-term liquidity is at a premium.
Floundering countries and institutions are fond of protesting that they have liquidity, rather than solvency, issues, but while illiquidity might not be as bad as insolvency, it is far from ideal.
Europe is suffering from a banking culture that has traditionally focused more on short-term funding than banks in other regions – a sudden lack of liquidity is a bigger stumbling block for European banks than their American counterparts.
Experts at Citi’s recent European credit conference said there were several reasons for Europe’s short-termist culture towards liquidity:
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However, Greg Markouizos, managing director of Citi’s London finance desk, seemed unconvinced by Buxton’s argument.
Markouizos suggests the focus on short-term liquidity is a result of differing regulatory attitudes between Europe and other regions:
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However, there are concerns about the lack of appetite among investors for the provision of short-term liquidity for the banks. Financial turmoil is making the providers of liquidity cagey.
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As more banks look to secure their short-term funding in an environment that is proving less amenable to such provision, banks are struggling to keep their short-term liabilities in check.
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One suggestion is that the ECB should cut interest rates to break down bank-funding costs. This thesis is supported by the strong performance of French and Spanish bonds in last Thursday’s auctions, a sign of hope that the ECB may lower interest rates at its next meeting.
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