EU Banks Deepen Dependence on Unlimited Central Bank Loans
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 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.
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?’”
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