BUSINESS
DECEMBER 21, 2011, 3:05 P.M. ET
Euro-Zone Banks Tap Big ECB Loans
By DAVID ENRICH
Hundreds of euro-zone lenders took out a total of €489.19 billion ($639.96
billion) in low-interest loans from the European Central Bank on Wednesday, as
the currency area extended a massive financial lifeline to its struggling
banking industry.
The ECB said 523 banks borrowed under the central bank's newly activated three-year lending facility. The unexpectedly heavy demand for the loans highlighted the severity of the funding crisis, but simultaneously stirred hopes that the rescue will help defuse Europe's two-year financial crisis—or at least prevent it from getting worse.
If the dry spell persists into 2012, it could become a major problem. European banks face more than €700 billion in debt maturing next year, including more than €200 billion in the first three months, according to regulators and analysts.
ECB officials had feared that without intervention, many banks would cut lending to small businesses and households, strangling Europe's already weak economy. The three-year loans, another batch of which will be available in February, are intended to avert such a scenario.
"It's much better to have this funding locked in rather than praying the market reopens," said John Raymond, an analyst with CreditSights in London. "I don't think you can say it's a game-changer but it sort of slows down the vicious circle."
The loan program appears to be the ECB's main weapon, at least for now, in combating Europe's crisis. The central bank has resisted pressure from politicians and market participants to aggressively buy euro-zone government bonds, arguing that such a move is outside its purview. But if the ECB eases fears about the Continent's banks, that would go a long way toward relieving anxiety about many countries' overall financial health.
Still, the lofty hopes of some leaders might be disappointed. Politicians including French President Nicolas Sarkozy have floated the concept of banks using the new ECB cash to snap up government bonds in financially shaky countries, where lackluster demand for their bonds in recent months has pushed their borrowing costs to unsustainable levels. But bankers and analysts play down the odds of that happening on a large scale, given the perceived riskiness of such bonds.
And the loan program isn't without risks. Some experts and regulators worry that banks are growing even more addicted to central-bank assistance, making it harder for them to eventually stand on their own. At the same time, the loan program encourages banks in countries like Spain and Italy to grow.
While the banks on Wednesday borrowed €489.19 billion, much of that was simply replacing other outstanding ECB loans that were coming due. Analysts estimated that Wednesday's loans injected about €190 billion of new liquidity into the banking system.
Some experts said Wednesday's ECB lending isn't likely to fully quench European banks' immediate funding needs. Nick Matthews, an economist at the Royal Bank of Scotland, said European banks face about €230 billion of debt maturing in the first three months of 2012 alone.
"This operation is not going to cover all the maturities," he said.
Another €250 billion of European government bonds also need to be refinanced in the first quarter.
Traditionally, banks satisfied much of their day-to-day financing needs by issuing unsecured bonds to institutional investors around the world. But the market for such debt largely evaporated in July, when Europe's crisis intensified. Investors haven't regained their appetite.
In the second half of 2011, European banks have issued about €80 billion of senior unsecured bonds, according to data provider Dealogic. That compares with €240 billion in the same period last year and €257 billion in 2009.
So far, that hasn't been an acute problem. Most banks satisfied the bulk of their 2011 funding needs in the first half of the year. They have been able to close any gaps by issuing safe but expensive secured bonds or by borrowing on a short-term basis from the ECB.
The decision by the ECB's new president, Mario Draghi, to offer an unlimited supply of three-year loans reflects the growing recognition among regulators and bankers possibility that funding markets could remain shut well into the new year. If banks can't replace their maturing debts, they are likely to compensate by reducing lending and other activities.
The ECB's loans are attractive largely because of their price. The ECB will charge an interest rate that is the average of its benchmark rate over the three-year life of the loans. That rate is currently 1%. It's likely to remain well below what most banks would have to pay to borrow from market sources.
The ECB didn't disclose which banks borrowed under the new program, hoping to shield them from any potential stigma associated with the loans. "It appears that a very large majority of the large financial institutions" in Europe participated, said Laurence Mutkin, head of European interest-rate strategy at Morgan Stanley. "They've taken a lot of their issuance needs out of the market."
One of the few banks to publicly confirm its participation was Italy's second-largest lender, Intesa Sanpaolo SpA, which said it borrowed €12 billion. Ireland's finance ministry said its banks also participated.
The loan program could further entwine the fortunes of Europe's banks and governments.
In Spain on Tuesday, the government sold €5.6 billion of bonds in an auction that saw interest rates dive to 1.7% from 5.1% a month earlier. That is a sign of surging demand, which analysts say most likely stemmed from small and midsize Spanish banks buying the bonds in order to use them as collateral for this week's ECB loans.
Such a trade could prove lucrative for the banks, given the considerable gap between the interest rates the Spanish bonds generate and the amount the banks are paying to borrow from the ECB. But it also means that Spanish banks are even more vulnerable to the Spanish government's financial woes.
A similar phenomenon occurred in Italy. Fourteen banks this week issued a total of €38.4 billion of government-guaranteed bonds that will be eligible to serve as collateral with the ECB, according to a document released on Wednesday by the Italian stock exchange.
Those banks already have seen their stocks and bonds battered this year by investors who worry that they are holding excessive quantities of potentially risky Italian government debt.
"The bank-sovereign nexus still has not been successfully broken and if anything is being reinforced," said Mr. Matthews, the RBS economist.
The ECB said 523 banks borrowed under the central bank's newly activated three-year lending facility. The unexpectedly heavy demand for the loans highlighted the severity of the funding crisis, but simultaneously stirred hopes that the rescue will help defuse Europe's two-year financial crisis—or at least prevent it from getting worse.
If the dry spell persists into 2012, it could become a major problem. European banks face more than €700 billion in debt maturing next year, including more than €200 billion in the first three months, according to regulators and analysts.
ECB officials had feared that without intervention, many banks would cut lending to small businesses and households, strangling Europe's already weak economy. The three-year loans, another batch of which will be available in February, are intended to avert such a scenario.
"It's much better to have this funding locked in rather than praying the market reopens," said John Raymond, an analyst with CreditSights in London. "I don't think you can say it's a game-changer but it sort of slows down the vicious circle."
The loan program appears to be the ECB's main weapon, at least for now, in combating Europe's crisis. The central bank has resisted pressure from politicians and market participants to aggressively buy euro-zone government bonds, arguing that such a move is outside its purview. But if the ECB eases fears about the Continent's banks, that would go a long way toward relieving anxiety about many countries' overall financial health.
Still, the lofty hopes of some leaders might be disappointed. Politicians including French President Nicolas Sarkozy have floated the concept of banks using the new ECB cash to snap up government bonds in financially shaky countries, where lackluster demand for their bonds in recent months has pushed their borrowing costs to unsustainable levels. But bankers and analysts play down the odds of that happening on a large scale, given the perceived riskiness of such bonds.
And the loan program isn't without risks. Some experts and regulators worry that banks are growing even more addicted to central-bank assistance, making it harder for them to eventually stand on their own. At the same time, the loan program encourages banks in countries like Spain and Italy to grow.
While the banks on Wednesday borrowed €489.19 billion, much of that was simply replacing other outstanding ECB loans that were coming due. Analysts estimated that Wednesday's loans injected about €190 billion of new liquidity into the banking system.
Some experts said Wednesday's ECB lending isn't likely to fully quench European banks' immediate funding needs. Nick Matthews, an economist at the Royal Bank of Scotland, said European banks face about €230 billion of debt maturing in the first three months of 2012 alone.
"This operation is not going to cover all the maturities," he said.
Another €250 billion of European government bonds also need to be refinanced in the first quarter.
Traditionally, banks satisfied much of their day-to-day financing needs by issuing unsecured bonds to institutional investors around the world. But the market for such debt largely evaporated in July, when Europe's crisis intensified. Investors haven't regained their appetite.
In the second half of 2011, European banks have issued about €80 billion of senior unsecured bonds, according to data provider Dealogic. That compares with €240 billion in the same period last year and €257 billion in 2009.
So far, that hasn't been an acute problem. Most banks satisfied the bulk of their 2011 funding needs in the first half of the year. They have been able to close any gaps by issuing safe but expensive secured bonds or by borrowing on a short-term basis from the ECB.
The decision by the ECB's new president, Mario Draghi, to offer an unlimited supply of three-year loans reflects the growing recognition among regulators and bankers possibility that funding markets could remain shut well into the new year. If banks can't replace their maturing debts, they are likely to compensate by reducing lending and other activities.
The ECB's loans are attractive largely because of their price. The ECB will charge an interest rate that is the average of its benchmark rate over the three-year life of the loans. That rate is currently 1%. It's likely to remain well below what most banks would have to pay to borrow from market sources.
The ECB didn't disclose which banks borrowed under the new program, hoping to shield them from any potential stigma associated with the loans. "It appears that a very large majority of the large financial institutions" in Europe participated, said Laurence Mutkin, head of European interest-rate strategy at Morgan Stanley. "They've taken a lot of their issuance needs out of the market."
One of the few banks to publicly confirm its participation was Italy's second-largest lender, Intesa Sanpaolo SpA, which said it borrowed €12 billion. Ireland's finance ministry said its banks also participated.
The loan program could further entwine the fortunes of Europe's banks and governments.
In Spain on Tuesday, the government sold €5.6 billion of bonds in an auction that saw interest rates dive to 1.7% from 5.1% a month earlier. That is a sign of surging demand, which analysts say most likely stemmed from small and midsize Spanish banks buying the bonds in order to use them as collateral for this week's ECB loans.
Such a trade could prove lucrative for the banks, given the considerable gap between the interest rates the Spanish bonds generate and the amount the banks are paying to borrow from the ECB. But it also means that Spanish banks are even more vulnerable to the Spanish government's financial woes.
A similar phenomenon occurred in Italy. Fourteen banks this week issued a total of €38.4 billion of government-guaranteed bonds that will be eligible to serve as collateral with the ECB, according to a document released on Wednesday by the Italian stock exchange.
Those banks already have seen their stocks and bonds battered this year by investors who worry that they are holding excessive quantities of potentially risky Italian government debt.
"The bank-sovereign nexus still has not been successfully broken and if anything is being reinforced," said Mr. Matthews, the RBS economist.
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