Portuguese Banks Stockpiling Asset-Backed Debt for ECB Loans, Fitch Says

Portuguese banks are building up reserves of asset-backed securities eligible as collateral for loans from the European Central Bank as borrowing in bond markets becomes more expensive, according to Fitch Ratings.

Fitch was asked to provide feedback on “several” new proposals by Portuguese lenders creating bonds secured by loans to small and medium-sized companies, the ratings company said in a report without providing details. The issues indicate Portuguese financial firms are seeking capital, Fitch said.

“Access to the debt capital markets has become more challenging and expensive for Portuguese banks in the recent months,” Philip Smith, a senior director at Fitch Ratings, said in the report published yesterday. “In response, Portuguese banks have been accumulating liquid assets eligible for discount at the ECB in case other sources of funding become scarce.”

Concerns that Greece’s fiscal woes could spread to other indebted euro-area countries have pushed up the cost of borrowing for nations including Portugal, which yesterday had its Aa2 rating put on review for downgrade by Moody’s Investors Service. The country issued 500 million euros ($642 million) of six-month bills at an average yield of 2.955 percent yesterday, up from a yield of 0.592 percent at a sale on Jan. 6.

Budget Crisis

Portugal’s budget deficit was 9.4 percent of gross domestic product last year, compared with the 3 percent target set by the European Union. Credit-default swaps on the nation’s debt climbed 18.5 basis points to a record 434 basis points, CMA DataVision prices show. An increase indicates deterioration in perceptions of credit quality.

Default swaps on Portuguese banks also rose to all-time highs. Contracts covering the debt of Banco Comercial Portugues SA jumped 37 basis points to 516, while Banco Espirito Santo SA climbed 26.5 to 537.5, CMA prices show. A basis point on a swap protecting 10 million euros of debt for five years is equivalent to 1,000 euros a year.

Banks create asset-backed debt by packaging loans into notes, which can be used as collateral for central bank funds. European lenders deposited 468 billion euros of the securities with the ECB last year, up from about 441 billion euros in 2008, after the U.S. subprime crisis prompted investors to shun the hard-to-value assets.

Portuguese lenders are putting together asset-backed securities at a time when loan arrears and defaults are rising, Fitch said.

“While there are no sharp increases in negative performance to date, the declining trend does contrast against a backdrop of broad stabilisation across most other European structured finance transactions,” Fitch said in the report.

To contact the reporter on this story: Esteban Duarte in Madrid at eduarterubia@bloomberg.net

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