European Banks May Deepen Their Dependence on Unlimited Central Bank Loans
EU Banks May Deepen Dependence
Simon Dawson/Bloomberg
A Euro sign sculpture stands in front of the European Central Bank’s (ECB) headquarters in Frankfurt.
A Euro sign sculpture stands in front of the European Central Bank’s (ECB) headquarters in Frankfurt. Photographer: Simon Dawson/Bloomberg
Jan. 23 (Bloomberg) — David Owen, chief European economist at Jefferies International Ltd., and Peter Chatwell, fixed-income strategist at Credit Agricole SA, discuss the outlook for euro-zone bonds and the European Central Bank’s role in easing credit concerns.
They talk with Owen Thomas and Linzie Janis on Bloomberg Television’s “Countdown.” (Source: Bloomberg)
European banks, shunned by investors
and each other, may borrow as much next month from the European
Central Bank as they did in a record offering in December as
they seek refuge from frozen funding markets.
The ECB last month lent banks an unprecedented 489 billion
euros ($637 billion) for three years. Analysts said they expect
demand to be just as high at a second auction on Feb. 29 because
the stigma associated with using the facility is dissipating and
the list of what assets can be used as collateral in exchange
for the loans will be extended. ECB President Mario Draghi said
last week he expects demand for loans next month to be “still
very high,” though “probably lower than in December.”
“February’s second three-year Long Term Refinancing
Operation looks set to be extremely large,” Credit Suisse Group
AG analysts led by William Porter wrote in a report to clients.
“The last LTRO has removed any stigma, making managements who
do not exploit the value on offer arguably careless at best.”
The ECB is flooding the banking system with cheap money in
a bid to avert a credit crunch after the market for unsecured
bank debt seized up and funding from U.S. money markets dries
up. Politicians, including French President Nicolas Sarkozy, are
pushing the banks to use the loans, which carry an interest rate
of 1 percent, to buy higher-yielding southern European sovereign
debt, thereby forcing down borrowing costs in the region.
The ECB is offering banks unlimited cash as lenders try to
refinance more than $765 billion of debt that matures this year,
just as institutional investors remain reluctant to buy debt
from all but the safest banks.
‘Flooding the Market’
“People aren’t prepared to lend to the banks, so the ECB
is just flooding the market with liquidity,” said Christopher
Wheeler, an analyst at Mediobanca SpA in London. “But it’s only
a temporary fix. The ECB is only buying time with these loans
hoping that things will improve.”
Lenders in Italy, Spain and France are using the loans to
purchase more of their domestic government debt to profit from
the difference between the interest rate on the ECB money and
the higher yield on sovereign securities, analysts said.
Two-year Spanish and Italian notes have rallied since the
ECB said on Dec. 8 it would offer banks unlimited three-year
money in exchange for eligible collateral. Yields on two-year
Spanish notes have fallen 178 basis points to 3.14 percent while
their Italian equivalents fell 269 basis points to 3.54 percent.
Longer-dated securities underperformed shorter-duration notes on
concern austerity plans won’t plug deficits and reduce Europe’s
debt load.
Italian, Spanish Lenders
Demand from more than 500 lenders in December dwarfed the
293 billion-euro estimate of economists surveyed by Bloomberg
News. Half of the loans were taken up by Italian and Spanish
lenders, Morgan Stanley analyst Huw van Steenis said in a Jan.
18 report to clients.
Italian banks were the main users, with UniCredit SpA (UCG), the
country’s largest lender, taking 12.5 billion euros, Intesa
Sanpaolo SpA (ISP), the second-biggest, accepting 12 billion euros,
and Banca Monte dei Paschi Di Siena SpA (BMPS) 10 billion euros, the
Morgan Stanley analyst estimated, citing conversations with 50
banks and policy makers. Spokesmen for the three banks declined
to comment.
Spain’s Banco Popular Espanol SA (RBS) took 6 billion euros,
while Banco Bilbao Vizcaya Argentaria SA (BBVA) used 5 billion euros,
according to Morgan Stanley. Bankinter SA (BKT) used 5 billion euros
Chief Executive Officer Maria Dolores Dancausa said in a news
conference in Madrid on Jan. 18. A spokesman for Popular wasn’t
immediately available to comment. BBVA declined to comment.
French Banks
French banks BNP Paribas (BNP) SA, Societe Generale (GLE) SA, Credit
Agricole SA and BPCE SA all borrowed from the ECB though
declined to say how much, Morgan Stanley said. Spokespeople for
the banks declined to comment. Royal Bank of Scotland Group Plc,
the U.K.’s largest government-owned lender, took 5 billion
pounds ($7.8 billion), according to the analysts. An RBS
spokesman declined to comment.
In all, banks may borrow between 150 billion euros and more
than 400 billion euros next month, van Steenis said. “It seems
even large cap banks have been open-minded to using this given
the size and lack of stigma of the first one,” he wrote.
Ronny Rehn, an analyst at Keefe, Bruyette Woods Inc. in
London, Gary Greenwood at Shore Capital in Liverpool, and Neil Smith at WestLB AG in Dusseldorf said they expect demand to be
similar to December.
Senior Debt
Matthew Czepliewicz, an analyst at Collins Stewart
Hawkpoint Plc in London, said demand may fall to 250 billion
euros as the market for senior, unsecured debt opens for the
strongest lenders.
Since the ECB’s first offering of three-year money last
month, banks including Rabobank Nederland and Nordea Bank AB
have sold more than 19.5 billion euros of benchmark senior
unsecured debt. That compares with 14.5 billion euros of bonds
sold by banks between July and December last year.
Other analysts said the ECB’s decision to ease the rules on
what banks can post in collateral in exchange for the loans
could push demand higher. Draghi announced the ECB would relax
the collateral requirements at a press briefing on Dec. 8.
Details on the new rules have not yet been published.
“The ECB is still deciding what will constitute acceptable
collateral,” Marchel Alexandrovich, an economist at Jefferies
International Ltd. in London said. “If criteria are loosened
enough, then demand for cheap money will undoubtedly swell up
and we may well see a figure in excess of 1 trillion euros” at
next month’s operation.
Credit Suisse’s Porter said he expects banks to borrow
slightly more than in December, about 500 billion euros, because
lenders won’t want to be put at a competitive disadvantage when
their peers can borrow cheaply from the ECB.
“This will remove some of the refinancing risk the banks
face and the markets are reacting positively after a bit of a
delay,” Porter said in a telephone interview. “But the more
fundamental question is how ‘long can you run a banking system
like this?’”
To contact the reporters on this story:
Liam Vaughan in London at
lvaughan6@bloomberg.net;
Gavin Finch in London at
gfinch@bloomberg.net
To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net
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Article source: http://www.bloomberg.com/news/2012-01-23/european-banks-may-deepen-their-dependence-on-unlimited-central-bank-loans.html
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