European banks feeling the pinch in the money markets
European banks are today feeling the pinch amid signs that US financial institutions are reducing their exposure to European money markets. Today we saw the London interbank offered rate, commonly referred to as Libor, increase hitting highs not seen for 10 months. When you consider that the Libor rate does not include bank lending from Spain and Portugal we can only assume the real situation in Europe is far worse than first assumed.
It is also becoming apparent that investors are taking flight from risky investments such as European sovereign debt and interest rates required on short-term lending have increased dramatically in the money markets. The problem we have is the fact that if European banks are unable to lend money from the money markets at attractive rates then their own rates will rise in tandem. This will make mortgages, loans and other financial instruments less attractive to consumers and businesses and increase the cost of finance for everybody concerned.
In what could become a self-fulfilling prophecy, a rise in the cost of lending will see more and more investors shun the markets which will push rates higher and higher and push many businesses and consumers to the edge. Things are very bleak in the European money markets!
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