European banks at risk of writedowns from the sovereign debt crisis face a funding squeeze that may depress earnings, curb lending and imperil economic recovery in the region.
Investors are shunning bank securities on concern Greek, Portuguese and Spanish bonds held by the lenders will plunge in value. Bank bond sales slowed last month to the lowest since Lehman Brothers Holdings Inc’s failure in 2008, as the extra yield buyers demand to hold the securities over government debt soared to the highest this year. Firms are wary of lending to each other, depositing record funds with the European Central Bank (ECB).
“There is a lot of mistrust,” said Christoph Rieger, co-head of fixed-income strategy at Commerzbank AG in Frankfurt. “Banks are trading with the ECB rather than with each other.”
The central bank is preventing a crisis by providing banks with unprecedented funding. In substituting long-term money with shorter-maturity ECB cash, policymakers are making it harder to wean banks off life support as well as the short-term financing that regulators blame for the credit crisis.
The cost of insuring bank debt from default rose close to a record last week. The Markit iTraxx Financial Index of swaps on 25 European banks and insurers climbed to 208 basis points on June 8, approaching the all-time high of 210 basis points set in March last year, JPMorgan Chase & Co prices show.
Italy’s Intesa Sanpaolo SpA, SEB AB, the second-biggest bank in the Baltic states, DnB NOR ASA and ING Groep NV have isolated themselves from the freeze by already selling all the debt they needed this year, according to estimates by Morgan Stanley analyst Huw van Steenis. Germany’s Commerzbank AG, France’s Natixis SA and Spain’s Banco Espanol de Credito SA have raised less than 35 percent of the senior funding they require, he wrote in a note to clients on Wednesday last week.
“If you’re not a quality borrower, you’re not going to get funding from the market until you reduce your loan-to-deposit ratio and shrink your balance sheet,” said Simon Maughan, an analyst at MF Global Ltd in London. “The credit and bond markets are doing their job. Unless you reform, you’ll be stuck on government support for the foreseeable future.”
Risk aversion is helping to spur sales of covered bonds, securities that are guaranteed by the issuer and backed by mortgages and other loans, reducing risk for investors and interest payments for the issuer. Financial firms have sold 11.5 billion euros (US$13.9 billion) of the bonds this month, three times the total for last month, according to van Steenis. Commerzbank raised 1 billion euros in an offering on Wednesday last week.
Banks are still struggling to borrow even from one another and loans with a maturity of more than one month are “rare and expensive,” making them depend more on ECB funding, Brice Vandamme, a London-based analyst at Deutsche Bank AG, wrote in a note to clients on Wednesday last week.
Shut out of the interbank market, lenders tapped the ECB for 122 billion euros of seven-day cash at the central bank’s last weekly tender on Tuesday last week. The 96 bidders paid an interest rate of 1 percent on those loans, almost three times the one-week euro interbank offered rate of 0.37 percent. The ECB didn’t identify the banks involved.
Europe’s lenders deposited a record 369 billion euros in the ECB’s overnight deposit facility on Wednesday last week, more than in the aftermath of Lehman’s collapse. Deposits have surpassed 360 billion euros for the past week. In the eight years leading up to Lehman’s collapse, eurozone banks deposited an average of about 277 million euros with the ECB.
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