Aug. 23 (Bloomberg) -- Four years
to the month since the global credit crisis began, European lenders
remain dependent on central bank aid, plaguing markets and economies
worldwide.
Emergency steps such as unlimited
loans from the European Central Bank are keeping many banks in Greece,
Portugal, Italy and Spain solvent and greasing the lending of others,
while low interest rates and debt-buying are containing borrowing costs.
Such aid is needed as concerns about slowing economic growth and
sovereign debt prompt banks to curb lending, stockpile dollars and hoard
cash in safe havens.
“I’m not sleeping at night,” said
Charles Wyplosz, director of the Geneva-based International Center for
Money and Banking Studies. “We have moved into a new phase of crisis.”
Central bankers rescued
financial firms after the collapse of Lehman Brothers Holdings Inc. in
2008 by providing limitless funding of as long as a year. While they
treated the symptom --a lack of ready cash -- politicians, regulators
and bankers in Europe have proved unable to cure the root cause: some
European lenders are at growing risk of insolvency.
The tremors, the biggest since
Lehman’s collapse, were triggered by European governments’ continuing
inability to stop the sovereign debt crisis from spreading beyond
Greece, Portugal and Ireland to question the Italy and Spain. Renewed
signs of economic weakness globally and the downgrading of U.S. debt by
Standard & Poor’s rekindled concern about the quality of all
government debt.
Bank Stocks Tumble
The signs of distress are
widespread and mounting: Banks deposited 105.9 billion euros ($152
billion) with the ECB overnight on Aug. 19, almost three times this
year’s average, rather than lending the money to other lenders. The
premium European banks pay to borrow in dollars through the swaps market
increased yesterday for a fourth straight day.
European bank stocks have sunk
22 percent this month, led by Royal Bank of Scotland Group Plc and
Societe Generale SA. Edinburgh-based RBS, Britain’s biggest
government-controlled lender, has tumbled 45 percent, and Paris-based
Societe Generale, France’s second-largest bank, dropped 39 percent.
The extra yield investors
demand to buy bank bonds instead of benchmark government debt surged to
298 basis points on Aug. 19, or 2.98 percentage points, the highest
since July 2009, data compiled by Bank of America Merrill Lynch show.
The cost of insuring that debt against default surged to a record
yesterday. The Markit iTraxx Financial Index linked to senior debt of 25
European banks and insurers rose to 250 basis points, compared with 149
when Lehman collapsed.
Greek Default Concern
It was the specter of
government debt turning toxic that has revived the liquidity crisis
policy makers had tried to stop in 2008. As speculation grew that
European banks would have to write down their holdings of more
governments’ debt after a Greek default, lenders pulled funding to those
banks that held the most peripheral debt. It also raised concern
European governments would struggle to afford a further bail out of
their banks, because both the state and the lenders had failed to reduce
their borrowings since the onset of the crisis.
“The debt has been transferred
from the banks to the sovereign, but it hasn’t actually been
eradicated,” said Gary Greenwood, a banking analyst at Shore Capital in
Liverpool. “Until the sovereigns get their balance sheets in order, then
these concerns are going to remain.”
Funding markets have seized up
as investors speculate that sovereign debt writedowns are inevitable.
Banks in the region hold 98.2 billion euros of Greek sovereign debt, 317
billion euros of Italian government debt and about 280 billion euros of
Spanish bonds, according to European Banking Authority data.
Euribor-OIS
The difference between the
three-month euro interbank offered rate, or Euribor, and the overnight
indexed swap rate, a measure of banks’ reluctance to lend to each other,
was at 0.67 percentage point on Aug. 22, within 3 basis points of the
widest spread since May 2009.
“The central bank is the only
clearer left to settle funds between banks,” said Christoph Rieger, head
of fixed-income strategy at Commerzbank AG in Frankfurt. “There is a
mistrust between banks in general, between regions and with dollar
providers overall.”
Overseas banks operating in
the U.S. may have cut dollar holdings by as much as $300 billion in the
past four weeks as European banks faced a squeeze on funding and sought
dollars, Jens Nordvig, a managing director of currency research at
Nomura Holdings Inc. in New York said Aug. 18. Dollar assets declined by
about 38 percent to $550 billion in the period, he said.
‘More Nervous’
“Banks are becoming more
nervous about being exposed to other banks as they hoard liquidity and
become more suspicious of other banks’ balance sheets,” Guillaume
Tiberghien, analyst at Exane BNP Paribas, wrote in a note to clients on
Aug. 19.
By contrast, banks in the U.S.
are “flush” with liquidity, loan loss reserves and capital, Goldman
Sachs Group Inc. analyst Richard Ramsden wrote in an Aug. 6 report.
Large commercial banks combined holdings of cash and securities at large
have climbed to 30 percent of managed assets, up from 22 percent at the
start of the U.S. financial crisis in October 2007, Ramsden wrote,
citing Federal Reserve data.
The Federal Reserve, which
provided as much as $1.2 trillion of loans to banks in December 2008,
wound down most of its emergency programs by early 2010. One of the few
exceptions was the central-bank liquidity swap lines that provide
dollars to the ECB and other central banks so they can in turn auction
off the dollars to banks in their own jurisdictions.
Trichet, Bernanke
Banks’ woes are again
thrusting central bankers to the fore as ECB President Jean-Claude
Trichet joins Fed Chairman Ben S. Bernanke and their counterparts from
around the world in traveling this week to Jackson Hole, Wyoming for the
Kansas City Fed’s annual policy symposium.
After increasing its benchmark
rate twice this year to counter inflation, the ECB this month provided
relief for banks by buying Italian and Spanish bonds for the first time,
lending unlimited funds for six months, and providing one unnamed bank
with dollars to satisfy the first such request since February.
In doing
so, it’s maintaining a role it began in August 2007 when it injected
cash into markets after they began to freeze.
Coming to the rescue isn’t
easy for the ECB. Its balance sheet is now 73 percent bigger than in
August 2007 and its latest bond-buying opened it to accusations that by
rescuing profligate nations it’s breaking a rule of the euro’s founding
treaty and undermining its credibility. Policy makers are also divided
over the best course of action, with Bundesbank President Jens Weidmann
among those opposing the bond program.
Economic Threat
The central bank is acting in
part because governments have yet to ratify a plan to extend the scope
of a 440-billion euro rescue facility to allow it to buy bonds and
inject capital into banks. Markets tumbled last week on concern policy
makers aren’t acting fast enough.
The funding difficulties of
banks was one reason cited by Morgan Stanley economists Aug. 17 for
cutting their forecast for euro-area economic growth this year to 0.5
percent next year, less than half the 1.2 percent previously
anticipated. They now expect the ECB to reverse this year’s rate
increases, returning its benchmark to 1 percent by the end of next year.
The economic threat is greater
in Europe because consumers and companies are more reliant on banks for
funding than their U.S. counterparts, said Tobias Blattner, a former
ECB economist now at Daiwa Capital Markets Europe in London. He says the
ECB should eventually try to hand over fire-fighting duties either to
governments, who would then inject capital into financial firms, or
national central banks, who could provide short-term loans to lenders.
Longer-term solutions may
involve the restructuring the debt of cash-strapped nations in a way
that doesn’t roil bank balance sheets, potentially in lockstep with a
European version of the U.S.’s Troubled Asset Relief Program.
Lena Komileva, Group-of-10
strategy head at Brown Brothers Harriman & Co. in London, said the
central bank may have no option but to extend the backstop role it is
playing for periphery banks to lenders elsewhere. Refusal to do so would
risk a European bank default by the end of the year, she said.
“Markets are back in uncharted territory,” said Komileva. “The crisis is a whole new story now.”
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