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business newsECB's Cheap Cash Ensures Little More Than a Short Holiday From the Crisis
By
Matthew Mallon
Dec 22, 2011 1:15 pm
But the 2012 hangover is going to be brutal.
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First, it bought the eurozone a little bit of holiday peace and quiet as bankers, traders and political leaders hit the beaches and chalets for the next week or so. The jaws of the credit crunch have been prized apart, once more, for a while.
Second, it allowed banks some breathing room as they prepare for new strict regulatory capital requirements coming up in the near future; much of the record 490 billion euros borrowed by eurozone banks will be used to help with the deleveraging demanded by these new regs, as they are forced to sell off 3 trillion euros in assets. As well, as analysts at RBS Economics have pointed out, many banks will simply roll-over their shorter-term seven-day, three-month and one-year loans into three-year cash, effectively recycling existing liquidity in the system. As much as 61% of the cash borrowed will end up being recycled in this manner.
Third, the record-setting rush to the cheap cash unsettled some investors, who took the stampede as yet another sign of the profound instability still lurking in the European banking system.
What the ECB’s move most decidedly didn’t do was convince any of those banks to, as French president Nicolas Sarkozy pleaded, start purchasing peripheral debt again in any significant manner. Hopes this might occur -- hopes that briefly sent Italian and Spanish bonds on the rise -- were quickly dashed, and Italian 10-year bond yields are now back up at 6.86%, flirting once again with the danger zone of 7%. Spanish 10-year bond yields were 8 basis higher on Thursday, at 5.39%
For an example of how many eurozone banks are actually going to use this momentary flood of cheap cash, look at Sapin’s second-largest bank, BBVA, which borrowed around 11 billion euros in the deal. BBVA will not be using that cash to purchase any sovereign debt, according to a Reuters source, or to get involved in any “carry-trade” operations, “whereby banks borrow the ECB money at 1 percent and buy government bonds with the same maturities from eurozone sovereigns, exploiting the difference in yields which could amount to more than 400 basis points.”
That’s a game some are playing right now, but BBVA will be using its cheap cash to cover upcoming 2012 maturities. Spain has some 130 billion euros of debt coming to maturity next year.
So, another delaying tactic that the market hasn’t wasted much time in seeing through. The ECB may have guaranteed itself a Christmas break, but with 2012 heading our way relentlessly, and both Spain and Italy facing punishing refunding schedules early in the year, this half-a-trillion euro move is one more band-aid on an arterial wound. The eurozone as a whole has a terrifying New Year’s hangover ahead of it, with 230 billion euros of bank bonds, 300 billion in government bonds, and more than 200 billion euros in collateralized debt all maturing in the first quarter of 2012. And with any political solution – the hoped for “fiscal union” – unlikely to arrive soon, the question is: what other tricks does the ECB have up its sleeve?
No positions in stocks mentioned.
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Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
