The global financial system is on the edge of a new credit crunch as the cost of insuring the bonds of banks across the world hits new highs, analysts have said.
By Harry Wilson, Banking Correspondent
8:39PM BST 02 Oct 2011
Credit default swaps on lenders as far afield as China and Australia, countries that until recently seemed immune to the chaos, have doubled in the last two months to levels not seen since the financial crisis.
In Europe, French and Belgian government officials are due to meet on Monday to discuss the crisis enveloping Dexia as speculation mounts about a possible break-up of the Franco-Belgian lender.
Last week, the cost of insuring Dexia bonds hit an all-time high of 900 basis points, nearly double the level just two months ago, meaning the annual cost to insure €10m (£8.59m) of the bonds is £900,000.
“The money ran out in June and what you are seeing now is the beginning of a new credit crunch, except this time it will be truly global, not Western,” said one senior London-based credit analyst.
Dexia, along with other European lenders, has been hard hit by the closure of the interbank lending markets and the continuing unwillingness of investors to buy the bonds of eurozone banks.
“Nothing is really working at the moment. None of the markets are functioning. Until Greece defaults it’s hard to see any resolution,” said one senior London-based credit analyst.
In China the publicly quoted cost of insuring the bonds of its three lenders for whom prices are available all closed on Friday at the highest levels in more than two years.
Credit default swaps on Bank of China bonds have more than doubled since the beginning of August and hit 316.53 basis points at the end of last week, their highest level since March 2009, while the lender’s shares hit a 12-month low.
“The worries on China’s banks are around the slowdown in growth, however, the symptoms are the same as those we are seeing in Europe,” said Simon Adamson, a banks analyst at CreditSights.
A report published last week by CreditSights drew attention to the growing problems of the Chinese banking sector, with some estimates putting the proportion of the lenders’ loan books that are non-performing at more than 40pc.
Australian banks, which have been major users of wholesale funding markets, are among those getting caught in the new crunch. Credit default swaps on the bonds of National Australia Bank and Australia and New Zealand Banking Group are not far off double the level they were just two months ago and last week reached 12-month highs.
Markets remain unconvinced that European politicians are capable of dealing with the region’s problems.
Greece was yesterday reported to have missed the deficit cutting target set for it by the EU and the IMF as part of the terms of its bail-out. According to Reuters, the Greek budget deficit will reach 8.5pc of GDP this year, missing a target 7.6pc.
An emergency meeting of eurozone finance ministers will today meet in Luxembourg to discuss the progress of Greek reforms that are necessary to secure the next €8bn tranche of bail-out money. Greece is to unveil new austerity measures.