Sunday, December 15, 2013

Ukranian liquidity drying up quickly

This week things are starting to freeze in the Ukraine. We are not talking about a repeat of 2009 where Russia shut off the gas during winter we are talking about the banking system.

All markets are ultimately driven by the flow of money and credit and in the Ukraine this flow is coming to a halt. Take a look at the chart of overnight unsecured lending rates between banks.

The banks are scared to lend to each other and this creates a negative feedback loop where distrust spreads. Of course there are political issues at hand that are dividing the country over its move to become part of the EU. Below is a photo from Reuters showing Pro-EU protestors guarding their main camp in Kiev. None of this turmoil is helpful as we approach December 18th where the EU will be working on finalizing the Single Resolution Mechanism (SRM) to deal with failed banks. As much as Ukraine would like to be part of the EU, they should realize that other Euro Zone members are going to think twice about letting them in if the Ukraine has a banking crisis. If rates stay where they are they will definitely have a banking crisis.

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