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Euribor rising: 'The banks don't trust each other'

Euribor rates are flashing a warning.

Although not as well known as its more widely quoted cousin Libor, the euro interbank offered rate - the rate at which about 50 of Europe's and the world's biggest banks lend to each other - is rising again. It reached fresh 8 1/2 month highs on Friday and has been going up nearly every day for weeks.

Euribor began its upward trajectory in early April, a rise that started with the crisis of confidence over Greek and other European government finances.

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In normal times, Euribor goes up when the European Central Bank tightens monetary policy or banks are facing more buoyant business conditions, leading to more demand for money to fund mortgages, business loans and other lending.

But the economy is struggling, and some savvy investors are tracking Euribor because they believe it gives an unvarnished picture of how executives at European banks - many of which are loaded up with questionable securities from Greece and other weak governments - see each other's creditworthiness.

If they don't trust the balance sheets, why should I? David Franklin, Sprott Asset Management

The banks, these investors believe, are becoming more wary about lending to each other because they are uncertain about the quality of the loans on some institutions' balance sheets, suggesting that credit quality concerns are the factor driving up Euribor.

"Basically what this tells me is that the banks don't trust each other because they don't know what they hold," says David Franklin, an analyst at Sprott Asset Management, of the trend in Euribor.

Sprott has been shorting shares of international banks, a tactic to make money if the prices of their stocks fall. Mr. Franklin says it's instructive that bankers - presumably the people who are most knowledgeable on the state of other financial institutions - are jittery.

"If they don't trust the balance sheets, why should I?" he asked.

The bellwether three-month Euribor rate rose to 0.748 per cent on Friday. A week earlier it had been 0.732 per cent, with the rate up every day since. The measure bottomed out around the beginning of April at 0.635 per cent. During the 2008-09 financial panic over the collapse of Lehman Bros., the rate did get as high as 5 per cent, so stresses in the financial system aren't anywhere near as severe as they were back then.

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Investors can follow the course of Euribor daily through several specialty financial websites.

Euribor has been gaining even though the European Central Bank, under the rescue package announced in May, has been buying up billions of euros' worth of Greek bonds and those of other weak governments, in effect helping to prop up their value. This gives European banks higher-than-free-market prices if they wish to unload securities from these countries and reduce the amount of risk on their balance sheets. Such sales would help reduce credit concerns, but the trend in Euribor suggests the central bank's actions aren't helping restore confidence.


Not all market watchers are enthralled with Euribor as an indicator of market stresses in European banks.

Market letter writer Dennis Gartman says those who avidly follow Euribor are making too much out of one or two basis-point moves in this interest rate. "Much ado is being made about very little," he says. A basis point is one-hundredth of a percentage point.

Mr. Gartman follows such instruments as credit default swaps or the price of insurance contracts on banks defaulting.

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Nonetheless, Mr. Gartman also believes Europe's big banks have concerns about each other. "They are reticent" about each other. "Wouldn't you be?" he said.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More

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