Rising funding costs for European banks are stoking fears that they could be forced to cut back lending and drag down the already struggling world economy.
The spreads for credit default swaps – essentially the price to insure five-year bonds – have hit all-time highs in the past two weeks for the big French and Italian banks, as well as Spain’s Banco Santander. The index of five-year bank CDS’s is now trading wider than during 2008, when the collapse of Lehman Brothers froze interbank lending and sparked a credit crunch.
Three-month interbank lending rates for euros are at their highest levels since 2009, and Italian use of the European Central Bank funding facilities doubled in July to €80bn, the highest level in at least four years.
“At the centre of the problems in the market is the growing probability being [factored] into the market of a global banking crisis,” said Jeffrey Gundlach, chief executive at Doubleline, a money manager.
“Banks are lending money to other banks and other countries, and the markets are thinking about whether those loans and bonds are going to be paid back.”
The broader situation is nowhere near as severe or as unstable in 2008. Not only do US and European central banks have in place more emergency facilities and are prepared to use them. But also new data out on Friday from the Federal Reserve showed that US branches of foreign banks increased their cash assets from $758bn for the week ending August 3 to $813bn. The increase confounded analysts who had predicted a big drop that would show European banks were having trouble raising dollars. But there are some deeply ominous signs.
European banks remain far more dependent on short-term dollar funding from the wholesale markets than their US peers, so any pullback from investors tends to hit them harder. Most European banks had little trouble raising funds in the first half of the year and the largest institutions are 90 per cent through their annual fundraising process, according to a recent Morgan Stanley report.
But issuance of senior debt and covered bonds dropped off sharply in July and basically stopped in August.
“We’re not confident that the term funding markets will reopen in September with sufficient depth and good enough pricing for southern European banks. A European temporary bank funding guarantee scheme backed by the European financial stability facility could make a real difference to restore confidence,” said Huw van Steenis, Morgan Stanley banking analyst.
According to Joseph Abate, money market strategist at Barclays Capital, the volume of commercial paper issued by financial groups is down 16 per cent since mid-June, and average maturities have shrunk. Some banks in particular are finding it difficult to get funding for longer than overnight.
“Anxiety levels are much, much higher than they were at the beginning of the week. . . Money market funds don’t have the confidence to go back into short-term European bank paper,” he said.
Another worrying sign is the growing use of the ECB’s overnight “deposit facility” – with banks depositing liquidity back with the central bank, rather than lending it to other banks because of concerns about counterparty risk.
More than €90bn was parked overnight on Thursday, slightly higher than earlier this week – and much higher than was typical before the escalation of the eurozone debt crisis. But it is still significantly below the €145bn peak earlier this month.
The ECB is concerned about the surge. “We take the signal seriously,” Jürgen Stark, an ECB board member, told a German newspaper. “The situation is, however, not comparable with that at the outbreak of the financial crisis after the collapse of Lehman Brothers.”
Separately, an unidentified eurozone bank borrowed $500m in dollars for seven days in this week’s regular ECB auction of dollars, operated in conjunction with the Fed, marking the first use of the facility since February. The relatively small amount borrowed, and the fact that there was only one bidder, still suggested any problems were specific to a single bank.
Use of the ECB’s emergency lending facility – the “marginal lending facility” – remains low and within the usual range, while overall use of ECB liquidity by all eurozone banks has crept up from about €400bn three months ago to about €500bn now.
Source: www.ft.com
The spreads for credit default swaps – essentially the price to insure five-year bonds – have hit all-time highs in the past two weeks for the big French and Italian banks, as well as Spain’s Banco Santander. The index of five-year bank CDS’s is now trading wider than during 2008, when the collapse of Lehman Brothers froze interbank lending and sparked a credit crunch.
Three-month interbank lending rates for euros are at their highest levels since 2009, and Italian use of the European Central Bank funding facilities doubled in July to €80bn, the highest level in at least four years.
“At the centre of the problems in the market is the growing probability being [factored] into the market of a global banking crisis,” said Jeffrey Gundlach, chief executive at Doubleline, a money manager.
“Banks are lending money to other banks and other countries, and the markets are thinking about whether those loans and bonds are going to be paid back.”
The broader situation is nowhere near as severe or as unstable in 2008. Not only do US and European central banks have in place more emergency facilities and are prepared to use them. But also new data out on Friday from the Federal Reserve showed that US branches of foreign banks increased their cash assets from $758bn for the week ending August 3 to $813bn. The increase confounded analysts who had predicted a big drop that would show European banks were having trouble raising dollars. But there are some deeply ominous signs.
European banks remain far more dependent on short-term dollar funding from the wholesale markets than their US peers, so any pullback from investors tends to hit them harder. Most European banks had little trouble raising funds in the first half of the year and the largest institutions are 90 per cent through their annual fundraising process, according to a recent Morgan Stanley report.
But issuance of senior debt and covered bonds dropped off sharply in July and basically stopped in August.
“We’re not confident that the term funding markets will reopen in September with sufficient depth and good enough pricing for southern European banks. A European temporary bank funding guarantee scheme backed by the European financial stability facility could make a real difference to restore confidence,” said Huw van Steenis, Morgan Stanley banking analyst.
According to Joseph Abate, money market strategist at Barclays Capital, the volume of commercial paper issued by financial groups is down 16 per cent since mid-June, and average maturities have shrunk. Some banks in particular are finding it difficult to get funding for longer than overnight.
“Anxiety levels are much, much higher than they were at the beginning of the week. . . Money market funds don’t have the confidence to go back into short-term European bank paper,” he said.
Another worrying sign is the growing use of the ECB’s overnight “deposit facility” – with banks depositing liquidity back with the central bank, rather than lending it to other banks because of concerns about counterparty risk.
More than €90bn was parked overnight on Thursday, slightly higher than earlier this week – and much higher than was typical before the escalation of the eurozone debt crisis. But it is still significantly below the €145bn peak earlier this month.
The ECB is concerned about the surge. “We take the signal seriously,” Jürgen Stark, an ECB board member, told a German newspaper. “The situation is, however, not comparable with that at the outbreak of the financial crisis after the collapse of Lehman Brothers.”
Separately, an unidentified eurozone bank borrowed $500m in dollars for seven days in this week’s regular ECB auction of dollars, operated in conjunction with the Fed, marking the first use of the facility since February. The relatively small amount borrowed, and the fact that there was only one bidder, still suggested any problems were specific to a single bank.
Use of the ECB’s emergency lending facility – the “marginal lending facility” – remains low and within the usual range, while overall use of ECB liquidity by all eurozone banks has crept up from about €400bn three months ago to about €500bn now.
Source: www.ft.com
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