The Liquidity Crunch Deepens

This news from reuters doesn't sound too promising, not at all it doesn't!

Money markets tightened further on Wednesday with the cost of borrowing euros in the wholesale interbank market hitting fresh 6-1/2 year highs as banks paid a higher premium for cash covering the New Year period.

Cash is getting less available and more expensive in the market since the credit crunch started in August as banks hoard cash as a contingency against credit-related losses. This general shortage is being exacerbated by liquidity concerns over the seasonally thin Christmas and New Year period.

London interbank offered rates (Libor) -- the benchmark lending rates between banks -- for two-month euros rose to 4.73875 percent at their daily fixing, the highest since May 2001. In early August rates were below 4.2 percent.

Libor rates for two-month dollars rose to a one-month high of 5.08563 percent, while sterling rates for the same period rose to a two-month high of 6.63875 percent.

"The level of confidence remains quite low. Banks are still reluctant to lend because of counterparty risk and balance sheet constraints on their own side," said Nathalie Fillet, senior fixed income strategist at BNP Paribas.

"Until recently, banks have been funding on an overnight basis but have now started to secure funding to cover the year-end. Hence, central banks have no choice but to continue to support and flood the market with liquidity."

And to all this can be added the announcement yesterday from the ECB that they are about to inject a further €30bn ($44.3bn) in one-week funds into the banking sector.

For what it's worth here's the most recent 3 month euro libor chart we have available (the BBA only updates the data with a one week time lag).




Also today we have news that China's CSI 300 Index has followed Japan's Topix into bear market territory, I have a much fuller reflection on what is happening to Japan in the Asian context up on Global Economy Matters.

German GFK Consumer Confidence Index December 2007 Down

German consumer confidence fell to the its lowest level in almost two years according to GfK AG's index for December, which is based on a survey of about 2,000 people. The index fell to 4.3 from a revised 4.8 in November, the market- research company said in Nuremberg today. That's the lowest reading since January 2006.



According to GFK:

An upswing in the consumer climate is unlikely, even towards the end of the year. While income expectations rose, economic expectations and the propensity to buy fell. Following the revised 4.8 points in November, the consumer climate forecast for December is 4.3 points.

Well-known economic risk factors, such as the strong euro, turbulences on the international financial markets and high food and energy prices continue to impact on the generally good German economy. A "sense of impending inflation” is currently influencing German consumers and the positive factors which are currently evident, such as the sustained improvement on the job market and rising incomes seem unable to prevent the evaporation of optimism where propensity to buy and economic expectations are concerned. Conversely, income expectations have stabilized at a slightly higher rate in November.

In fact, the rise in income expectations is pretty marginal - from minus 0.7 to zero - and the sub indexes are in non too spectacular shape generally.



What we can say is that the income expectations are now pretty flat, that the expectation about the economic outlook has been steadily deteriorating since June, while the propensity to consume took a nose-dive after December 2006 (isn't that strange, just after the 3% VAT hike that everyone said wouldn't matter) and hasn't budged, except slightly downwards. What this seems to indicate is that German consumers are now preparing for a hard winter (a hard and more elderly one) and, like their Italian counterparts, are busy thinking about saving. Maybe this helps put yesterday's IFO reading in a bit more perspective. I think the IFO was more about current conditions (and how they have mildly surprised on the upside) than about anticipated future ones.

Italian Business Confidence November 2007

Well hot on the heels of the small rise in the German IFO business confidence index we find that in contrast the ISAE Italian business confidence index declined in November to the lowest in almost two years as the euro's gains have been acting as a curb on exports. The Isae Institute's business confidence index fell to 92.2 from a revised 92.8 in October, the Rome-based research center reported today. That is the lowest reading since December 2005.




Again, I would draw attention to Claus Vistesen's eurozone Q3 GDP conclusions:

Although the slowdown seems set to be Eurozone and indeed also EU25 wide I will be watching Italy, Greece, and Portugal in particular since these three countries are those most likely to feel the pinch longest and hardest.