Oakley on tight credit, counterparty risk around Europe's sovereign crises

...Banks are now more reluctant to lend to each other than at any point since the problems of Greece first blew up last October, according to analysts at Tullett Prebon and Icap, the interdealer brokers.

Deteriorating conditions in interbank money markets are leading some analysts to predict the next crisis will be among the banks. Even Europe's biggest banks, such as Deutsche Bank, Barclays, BNP Paribas and Société Générale, are suffering as the cost of insuring these banks against default rises.

A key measure of bank risk, the overnight index swap (OIS) spread on futures contracts in the eurozone, rose to an all-time high this week. This measures the premium over "risk-free" overnight rates of three-month rates, which carry greater credit risk.

Another warning sign is a significant shift to overnight lending by banks, particularly within troubled areas of the eurozone. Of the €450bn ($589bn) in daily turnover in the European money markets, 90 per cent is now in overnight lending, according to interdealer brokers...