MONEY MARKETS-Funding options wane as debt crisis intensifies
Thursday, April 26th, 2012* Funding doors quietly close as debt crisis ramps up
* Short and longer-term funding dwindling
* But ECB liquidity should tide banks over
By Kirsten Donovan
LONDON, April 11 (Reuters) – The latest escalation of the
euro zone debt crisis, with Spain now taking centre stage, is
closing funding markets for banks again on concerns over
exposure to the large amount of sovereign debt now being hoarded
by some institutions.
Spanish and Italian bond yields have risen sharply over the
last week as the effects of the European Central Banks
three-year liquidity operation wear off and worries about
Spains ability to meet its budget targets and fund itself grow.
That means banks that used the ECBs cash to buy bonds
issued by their own governments may be looking at losses if they
need to sell that paper to repay debt.
If you parked the ECB cash in government bonds then youre
losing money if you need to sell them to repay your own
bondholders, said Rabobank rate strategist Lyn Graham-Taylor.
That has to worry banks. Effectively sovereigns and banks
in Spain and Italy have become ever more closely tied together
through the (ECBs three-year tenders).
Spanish banks holdings of government bonds rose by almost
70 billion euros from the end of November to the end of
February, while Italian banks holdings have risen almost 55
billion euros, according to ECB data.
Fears over individual bank exposure to the euro zone debt
crisis was behind a shut-down in funding markets in the second
half of last year, and traders said the pick-up in unsecured
interbank lending that had been seen since January had partially
reversed. Lenders were again becoming pickier who they give cash
to, they added.
Doors to longer-term funding markets have also quietly
closed again, not only to banks in Spain and Italy but also to
some corporate issuers in the two countries.
We shouldnt put the weakness at the door of illiquidity or
the Easter break, but more at Spains door, said Societe
Generale credit analyst Suki Mann.
The speed at which the market has unwound, propagated by
higher peripheral bond yields, is illustrative of how important
it is that we contain Spain. To this end, decisive action
somewhere needs to be taken.
On Tuesday, Bank of Spain Governor Miguel Angel Fernandez
Ordonez said Spanish banks, already hurting from a property
crash, could need more capital if the economy continues to
deteriorate and they face a new wave of loan defaults.
Reflecting those concerns, the cost of insuring against a
default by Spanish bank Santander – seen as one of the countrys
strongest – has risen around 25 basis points in April, according
to 5-year credit default swap prices from Markit
. For BBVA it is around 70 basis
points higher.
Another risk as sovereign bond yields rise is that margins
in the repurchase (repo) market, where banks use government
bonds as collateral to access cash, may rise, making it a less
effective way of funding.
Clearing House LCH.Clearnet cut its margin rate on Spanish
bonds just three weeks ago, citing the fall in the yields seen
since the beginning of the year, but it has not adjusted Italian
margins since raising them in January.
(A margin rise) would undeniably have an impact but
probably but less so than similar hikes have done in the past,
said ICAP strategist Chris Clark.
The market will be more prepared for it this time around
and also there seems to be less active positioning in repo
markets these days.
Also, banks holding Spanish and Italian government bonds
arent as reliant on the repo market for funding since the ECBs
massive three-year liquidity injections, Clark added.
With money market curves virtually flat, banks are tending
to only enter into repo trades overnight as there is no premium
for lending longer-term.
For example, the overnight rate for Spanish general
collateral repo was last seen at 0.33 percent, according to
ICAP, with the three-month rate at 0.35 percent.