In December 2008 financial market liquidity (in Europe) disappeared altogether, vanished according to the ECB FSR June 2010 . For monetarists like me this massive disappearance precedes & probably causes the massive GNP collapse of 3 quarters later; visually the 2 collapses have close to identical shapes.
In the midst of this LIBOR / EURIBOR scandal I thought I would share some references to LIBOR & its role in world capital markets from asymptotix. One would not generally reference LIBOR or EURIBOR explicitly since that would be far too arcane even for us!! Most of my references to LIBOR are in “asymptotix papers” which are long pdf documents; developed with the sole purpose of boring you to death!
About this running LIBOR rigging story, unravelling this weekend; a ‘friend’ said
“What they've caught onto is barely the tip of the iceberg. Eventually, the part below the surface might be revealed...”
Why are LIBOR & EURIBOR so important? They are the foundations, the technical-basis of the TERM STRUCTURE of interest rates; a crucial concept in Macroeconomics (& in banking risk management); in summary the 'term structure' is the PIVOT between MONEY & (real economic) ACTIVITY. LIBOR (or EURIBOR for Euro demoninated transactions) is the base, the lowest value of the 'term structure' vector (what is sometimes called the 'ratchet'). The technical phrase ‘Yield Curve’ can be used interchangeably with ‘Term Structure’. I give some colorful articulation of that relationship between Monetary conditions and the real economy in the references here on this page (but particularly in the paper below);-
Federal Deposit Insurance Corporation on Systemically Important Institutions and the Issue of Too Big to Fail
Statement of Sheila C. Bair, Chairman, before the Financial Crisis Inquiry Commission; Room 538, Dirksen Senate Office Building, September 2, 2010.
The BIS Quarterly Review for June 2010, released today, attributes the recent surge in volatility in global financial markets to a loss of investor confidence due to fiscal concerns and the risk of weaker growth. The European rescue package bought a temporary reprieve from contagion in euro sovereign debt markets, but market concerns about the economic outlook remain.
The June issue also provides highlights from the latest BIS data on international banking and financial activity.
The European sovereign debt crisis continues to rattle global markets as uncertainty over austerity measures and a proposed bailout have people questioning whether the Eurozone will be able to survive more financial trauma.
Are we about to enter a third, and this time fatal, leg of the financial crisis? The problems of euroland which have so unsettled markets this week – and in particular those of Portugal, Ireland, Greece and Spain (the "pigs", as they have become known in financial circles) – are worrying enough in themselves
European leaders said they were ready to support heavily indebted Greece to stave off a crisis in the euro zone, but disappointed markets by failing to offer any details on how aid would work.
EU President Herman Van Rompuy told a news conference after a summit of the bloc's leaders in Brussels that Europe was sending Greece a "clear message of solidarity."