The European Central Bank’s massive injection of liquidity into the euro zone’s banks on December 21 looks set to ease funding pressures on the banks for the first quarter of 2012, even if it does not directly deal with the fundamental problem of the sovereign debt crisis.
In a significant concession designed to support efforts by the European Union to deliver fiscal reform, the ECB announced earlier this month that it would offer banks its most generous funding yet: three-year long-term refinancing, compared with previous matuirities of just over one year. The central bank also broadened the collateral it would accept from banks to single-A rated asset-backed securities. The region’s hard-pressed lenders lapped up the funding, with 523 banks tapping the ECB for a total of €489.2 billion of funding at a rate of 1.
Bankers, analysts and investors generally welcome the new refinancing operation. Laurent Fransolet and Giuseppe Marraffino, fixed income analysts at Barclays Capital in London, said in a note to clients that the move was positive. They estimated that the operation would help banks roll over €296 billion of existing debt and provide €193 billion in new funding. They warned, however, that “more of the intermediation and bank funding will be reliant on the ECB.”
Yet this supportive attitude of the ECB is already encouraging investors to look more positively at bank debt, according to some fixed income fund managers. Satish Pulle, who is lead portfolio manager, financials, at European Credit Management, a London–based unit of Wells Fargo that is launching a €500 million fund to invest in bank debt, says the ECB’s three-year loans “help to deal with the mountain of refinancing that needs to be done. And this move also shows that there’s been far too much talk about the breakup of the euro zone. There’s a reasonable probability of things stabilizing.”
A senior executive at a bank that describes itself as a net lender in the interbank market also welcomed the move, saying he is now confident that the ECB is acting as an effective lender of last resort to euro zone banks.
But European banks still face severe challenges in 2012. They have had to cope with the virtual closure of the market for senior unsecured debt since the summer, creating what ECB President Mario Draghi described on December 8 as “serious funding pressures.” Euro zone banks have to refinance nearly €600 billion of debt maturing in 2012, Dealogic figures show, with about €230 billion of that total coming due in the first quarter.
Draghi says he wants to curb deleveraging by Europe’s banks, which threatens to be a drag on the European economy and aggravate the region’s debt crisis. Banks have so far announced €1.2 trillion of assets sales and reductions, according to research by Nomura, in an effort to meet the new Basel III core tier-one capital ratio of 9 percent and other regulatory requirements. Mark Carney, governor of the Bank of Canada and chairman of the Basel–based Financial Stability Board, said earlier this month that deleveraging could expand to as much as €2.5 trillion in 2012 and cause a global recession.
Markets reacted positively to the ECB refinancing. The FTSE Eurofirst 300 banks index stood nearly 4 percent higher for the week, as of late Thursday, December 22. Share prices in leading French and Italian banks in particular rose strongly on December 22, with BNP Paribas up 3 percent and Unicredit up 2 percent. Sovereign debt showed little movement, however, with yields on Italy’s 10-year bond standing at 6.81 percent and Spain’s at 5.35 percent.
Sovereign debt, rather than bank debt, lies at the heart of the euro zone crisis. Most investors want to see “more aggressive buying of sovereign debt by the ECB” before they return to buying bank debt, says Nick Gartside, London–based international chief investment officer of fixed income at JP Morgan Asset Management.
It is not yet clear if many of the banks will use the new ECB funding to buy government bonds, as many did with the ECB’s initial offering of one-year loans in 2009. Italian banks Unicredit and Intesa Sanpaolo said in statements on December 22 they will use their ECB funding for lending to Italian consumers and companies.
