European Banking Monitor: Portugal, Portugal, Portugal

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .




Key Takeaways:

Portuguese sovereign swaps rose 83 bps last week to 556 bps, and are up 185 bps in the last month (+50%). Since 5/22, Portuguese swaps have doubled off their lows of 274 bps. By comparison, the rest of Europe is up 7-12% MoM. 


The CDS increases last week from Spanish, Portuguese, and Italian banks reflect heightened political instability at the country level.  Spain's corruption scandal of slush kickbacks to PM Rajoy's ruling party are reverberating even louder as new sources confirm the payments. Portugal's government remains on the precipice of snap elections over pushback on austerity and the fall-out from the resignations of the finance and foreign ministers in the first week of July.  Finally, Italy's coalition government remains fractured with persistent threats based on impending court rulings on Silvio Berlusconi.


We expect this political risk to carry through much of the summer. Despite calls from Portugal's President that an agreement with the main opposition will be reached shortly, we caution that underlying popular tensions in Portugal (but also across much of the periphery) are here to say given deep structural imbalances that fuel unrest. 



European Financial CDS - Most of Europe's banking system was uneventful last week. Spanish, Portuguese and some Italian banks posted noteworthy increases, however.


European Banking Monitor: Portugal, Portugal, Portugal - vv.banks


Sovereign CDS – Sovereign swaps were almost universally tighter last week, with one major exception. Portuguese swaps widened 83 bps WoW to 556. In the past month, Portuguese swaps have widened out 185 bps. This is a significant negative divergence from the rest of Europe. Is it too soon to begin asking whether Portugal is beginning to fulfill its destiny as Greece II? The data is starting to suggest that.


European Banking Monitor: Portugal, Portugal, Portugal - vv.sov 1png


European Banking Monitor: Portugal, Portugal, Portugal - vv. sov2


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Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 12 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 


European Banking Monitor: Portugal, Portugal, Portugal - vv.euribor


ECB Liquidity Recourse to the Deposit Facility – Deposits fell by 17 billion Euros last week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  


European Banking Monitor: Portugal, Portugal, Portugal - vv.facility

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