Here are two stories that I have picked up on that demonstrate how contagion spreads during a panic. Both stories involved the strongest of actors within the eurozone.
The first story is from Spain. The Wall Street Journal is reporting that the Spanish bank Banco Bilbao Vizcaya Argentaria (BBVA) is having a difficult time funding itself in the US commercial paper market. Moreover, according to the Journal this has been going on for some time – since the beginning of the month. The amount is small ($1 billion) given BBVA’s large balance sheet which is almost $700 billion, the same as when the crisis started in 2007. And BBVA is widely seen, along with Banco Santander, as the healthiest institution in Spanish banking. Their having problems rolling over paper speaks to the panic of CP buyers, in my view. But the commercial paper market has also been a major source of bank runs since the credit crisis began and this has to be seen by authorities in the US and Europe as a signal of liquidity problems.
The second story involves the German state. Bloomberg has reported that the auction of German five-year notes only received a bid-to-cover ratio of 1.1, as close as you can get to a failed auction (hat tip Scott). Moreover, this was the worst showing since March 2008 when Bear Stearns was having funding problems in the CP market. You have to see this as connected to the commercial paper funding problems of BBVA since Germany is considered the standard setter for sovereign debt in the eurozone.
In any event, German bund yields are exceedingly low as there has been a flight to safety in global markets. So while the Bund story is remarkable, Germany could have received a higher bid cover had it offered a lightly higher yield on its bonds.
What do I make of this? For starters, I don’t think it is entirely rational because the two entities I identified are the strongest in their respective markets. These stories have all the hallmarks of panic. Yet, it speaks to a certain eurozone debt revulsion that is now widespread.
Moreover, Germany does have the hidden exposure of the Landesbanks who have been speculating recklessly in Spanish and US property, Greek sovereign debt and US subprime. That’s what my GMAC/HRE post last summer was about. I don’t think the Germans really understand the interconnectedness. Their banks have exposure everywhere. This is where the contagion comes from much as it did in 1931 – via the interlocking global financial arrangements.