Tuesday, March 20, 2018

Trump's tax cuts and reform already creating liquidity problems for European banks

Shortly after Congress and the President passed and signed a bill to institute tax cuts and reform, we had mentioned in a podcast how this law had to the potential to create serious liquidity issues for Europe as U.S. companies that held deposits overseas may bring them back to be used domestically.  And now just a few months later, this very fear appears to be coming to pass.

The European inter-bank market is going through the biggest shortage of US-dollar liquidity in nearly nine years. According to analysts, US tax reform may be behind the largest deficit since the financial crisis. 
As the Federal Reserve took a more hardline position towards the US monetary policy, LIBOR, a benchmark rate tied to finance products and debts of over $350 trillion, soared to the highest level in over eight years. Current unsecured dollar loans for the last three months are forcing European banks pay 2.2 percent in annual interest, according to financial news website Finanz.ru. 
The finance sector has seen a widening of the so-called Libor-OIS spread. This indicator shows the level of availability of the US currency. Its mean value has nearly doubled over the past two years. 
The rapid widening of the Libor-OIS spread shows that the market faces a dollar deficit, according to an economist at VTB Capital Neil McKinnon, as cited by the media. The tax reform, currently implemented by the US government, could reportedly have an impact on dollar liquidity across the globe. The measure seeks to encourage American corporations to bring nearly $2 trillion from foreign accounts back home.  – Russia Today


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