Worries are rippling through debt and stock markets despite the insufficient measures taken by European leaders last week to help restore investor confidence. Reflecting the tension, rates that banks charge each other for short-term borrowing in dollars continued to balloon, hitting new highs not seen since 2009. Italian government bond yields jumped back above 7%, a level that would crimp Italy’s ability to borrow in the future. Amid the rush for dollars the safe-haven , the euro continues to stay below $1.30 since yesterday. This is the lowest the euro has been in eleven months
The biggest announcement has been that Crédit Agricole SA, France’s third-largest bank, said it will exit 21 of the 53 countries in which it operates to help shore up its finances. Commerzbank AG, struggling to avoid accepting a bailout by the German government, is in talks to transfer potentially bad assets to a government-owned “bad bank.”
Investors worry that the recent steps taken by Europe’s leadership have done little to slow the growing strains across the markets. The concern is that with no solution in sight to the sovereign debt crisis, banks, which hold hundreds of billions of dollars of Sovereign bonds, are at risk of suffering massive losses, threatening to cripple the eurozone’s banking system.
In this climate both investors and banks are demanding higher interest in return for the risk. Some are just refusing to lend. The retreat threatens to create a vicious cycle for the eurozone. Europe is far more dependent on lending from its banks than the U.S. economy, where financial markets play a greater role financing companies and individuals.
European banks are exposed to big potential losses in countries like Italy and Spain. The banks have huge portfolios of government bonds, and an increasingly likely European recession would hurt the value of all their assets.
Fitch Ratings on Wednesday evening lowered its ratings on five big banks from Denmark, Finland, France and the Netherlands. Fitch said the downgrades reflected deteriorating market conditions.
Earlier in the day, focus was on the potential downgrades of sovereign nations, as France’s finance minister played down the potential impact of any downgrade of France’s Triple-A rating.
As the European financial crisis continues to unfold, concerns about the eurozone banking system have mounted. Earlier in 2011, U.S. money-market mutual funds, long important providers of short-term cash to European banking firms, began to reduce their exposures to the region sharply. Banks have been able make up for some of that lost liquidity by borrowing at the European Central Bank. But analysts estimate European banks have more than €700 billion of debt maturing next year that must be refinanced.
European leaders continued to resist some of the sweeping measures investors were seeking—such as the ECB buying sovereign debt en masse, or the creation of a common eurozone bond. Jens Weidmann, president of Germany’s Bundesbank and member of the ECB governing council, said he remained vehemently opposed to the ECB printing money. German Chancellor Angela Merkel reiterated that creating such a bond would be no solution to the turmoil.
Europe’s troubles are weighing on financial institutions around the world. In Australia, Westpac Banking Corp. warned Wednesday that Europe’s debt woes will impact the price and possibly the availability of credit to Australia’s banks.
The world continues to wait on European Leaders, each day the inevitable collapse of the euro becomes more probable and possible. Without a plan of action world must react to force the situation. Time is running out quickly, but European leaders seem to be taking tea.