Keeping a country like Spain afloat financially may not be enough to salvage its banks without direct injections of capital, according to Christine Lagarde.
The managing director of the International Monetary Fund renewed calls to rejigger European rescue programs to allow for direct recapitalization of the region’s banks without forcing funds to flow through government coffers first.
“The European Stability Mechanism and European Financial Stability Facility could actually help in terms of recapitalization anywhere in the euro zone. It has to be channeled through sovereigns. … What we are advocating is that this be done without channeling through the sovereigns,” Lagarde said in Washington D.C. Thursday, according to Reuters.
Lagarde, speaking as meetings of the IMF, World Bank and G-20 finance ministers convene in the U.S. capital, is not alone in believing that European banks are in dire need of more capital.
In December, the European Banking Authority estimated EU banks needed €114 billion in capital and in its global financial stability report this week the IMF warned that the area’s financial institutions were still in need of considerable deleveraging.
While some efforts have been made to that end, the European Central Bank’s long-term refinancing operations — which doled out more than a trillion dollars in a pair of offerings in December and February — provided enough liquidity to cool things off for several months.
The European crisis is flaring again though, with Spain now the epicenter. The Spanish Treasury managed to raise slightly more than €2.5 billion an auction Thursday, but it did so at higher yields, including 5.78% on 10-year bonds that went off at 5.4% in January.
The market doesn’t see borrowing costs falling much, pricing the 10-year yield at 5.92% Thursday afternoon. (See “Spains Survive Auction With Better Than Expected Demand.”)
One major concern is if banks decide to stop funding sovereigns, which could happen if firms’ determine that the necessary austerity measures and spending cuts will curtail economic growth, which is crucial to lending business. While the ECB’s LTROs likely helped keep the money flowing into government coffers in the euro zone, the appetite for another batch of loans from the central bank may be waning.
Lagarde’s call to repurpose the agreed-upon European bailout mechanisms to provide for more direct aid to banks is reminiscent of the moves made by the U.S. Treasury in 2008 under then-Secretary Hank Paulson.
After winning approval from Congress for the $700 billion Troubled Asset Relief program, the Treasury Department opted to use the funds for direct capital injections into banks, in return for interests that could convert to equity stakes, rather than the initial plan of purchasing toxic assets off firms’ balance sheets.
European bank stocks were trading mostly in the red Thursday. NYSE-listed shares of Spain’s Banco Santander and BBVA were down more than 2.5% apiece, while Italy’s UniCredit was off 1.4% in Milan.
France’s BNP Paribas, Crédit Agricole and Société Générale were down more than 3%, while Germany’s Deutsche Bank and Commerzbank saw narrower declines.
Banks are also facing potential downgrades from Moody’s, after the ratings agency warned in February that it would review its credit scores on a slew of major financial institutions around the world, a review that could be completed in a matter of weeks.
forbes.com
The managing director of the International Monetary Fund renewed calls to rejigger European rescue programs to allow for direct recapitalization of the region’s banks without forcing funds to flow through government coffers first.
“The European Stability Mechanism and European Financial Stability Facility could actually help in terms of recapitalization anywhere in the euro zone. It has to be channeled through sovereigns. … What we are advocating is that this be done without channeling through the sovereigns,” Lagarde said in Washington D.C. Thursday, according to Reuters.
Lagarde, speaking as meetings of the IMF, World Bank and G-20 finance ministers convene in the U.S. capital, is not alone in believing that European banks are in dire need of more capital.
In December, the European Banking Authority estimated EU banks needed €114 billion in capital and in its global financial stability report this week the IMF warned that the area’s financial institutions were still in need of considerable deleveraging.
While some efforts have been made to that end, the European Central Bank’s long-term refinancing operations — which doled out more than a trillion dollars in a pair of offerings in December and February — provided enough liquidity to cool things off for several months.
The European crisis is flaring again though, with Spain now the epicenter. The Spanish Treasury managed to raise slightly more than €2.5 billion an auction Thursday, but it did so at higher yields, including 5.78% on 10-year bonds that went off at 5.4% in January.
The market doesn’t see borrowing costs falling much, pricing the 10-year yield at 5.92% Thursday afternoon. (See “Spains Survive Auction With Better Than Expected Demand.”)
One major concern is if banks decide to stop funding sovereigns, which could happen if firms’ determine that the necessary austerity measures and spending cuts will curtail economic growth, which is crucial to lending business. While the ECB’s LTROs likely helped keep the money flowing into government coffers in the euro zone, the appetite for another batch of loans from the central bank may be waning.
Lagarde’s call to repurpose the agreed-upon European bailout mechanisms to provide for more direct aid to banks is reminiscent of the moves made by the U.S. Treasury in 2008 under then-Secretary Hank Paulson.
After winning approval from Congress for the $700 billion Troubled Asset Relief program, the Treasury Department opted to use the funds for direct capital injections into banks, in return for interests that could convert to equity stakes, rather than the initial plan of purchasing toxic assets off firms’ balance sheets.
European bank stocks were trading mostly in the red Thursday. NYSE-listed shares of Spain’s Banco Santander and BBVA were down more than 2.5% apiece, while Italy’s UniCredit was off 1.4% in Milan.
France’s BNP Paribas, Crédit Agricole and Société Générale were down more than 3%, while Germany’s Deutsche Bank and Commerzbank saw narrower declines.
Banks are also facing potential downgrades from Moody’s, after the ratings agency warned in February that it would review its credit scores on a slew of major financial institutions around the world, a review that could be completed in a matter of weeks.
forbes.com
No comments:
Post a Comment