Friday, February 24, 2012

European Banking Crisis Causes Cash Problem

ECB May Allot 470 Billion Euros in 3-Year Crisis Loans: Economy

Matthew Brockett and Jeff Black, ©2012 Bloomberg News
Friday, February 24, 2012

Feb. 24 (Bloomberg) -- Euro-area banks may tap the European Central Bank next week for almost as much three-year cash as they did in December in an operation that could prolong a rally in bond markets.

Financial institutions will ask the ECB for 470 billion euros ($629 billion) in three-year funds for allotment on Feb. 29, the median of 28 estimates in a Bloomberg News survey shows. While that's less than the record 489 billion euro take-up at the first tender on Dec. 21, it may increase total cash in the system by more than 300 billion euros, said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan.

"Part of the increase will likely be parked, at least temporarily, in the sovereign-bond market and support mainly the performance of Italian and Spanish bonds," said Cazzulani. Still, "expectations are at a pretty high level, which creates some room for disappointment," he said. "Gross demand below 400 billion euros would likely put upward pressure on spreads in the short term."

Italian and Spanish bonds have risen since the ECB's first three-year loan, suggesting banks are investing at least some of the money in higher yielding assets. That's helped ease concern about a credit crunch and won governments time to agree on measures to contain the sovereign debt crisis.

'Lose-Lose' Air

The yield on Spain's two-year bond has dropped to 2.62 percent from 3.88 percent since Dec. 21 and the rate on a similar Italian bond has fallen to 2.87 percent from 5.14 percent. The extra yield investors demand to hold two-year Italian notes over German debt has fallen to 263 basis points from 492 points on Dec 22. That spread was 720 points on Nov. 25, a euro-era high.

The risk is that banks become too reliant on ECB money and fail to take the steps needed to strengthen their balance sheets.

"There is a 'lose-lose' air around the ECB's auction next week," said Simon Smith, chief economist at foreign-exchange broker FXPro Group Ltd. in London. "If take-up is low then markets are likely to be disappointed. If take-up is high, then although this may give markets a boost, the bigger picture is of markets becoming increasingly reliant on the ever-expanding good nature of central banks. All well and good, but the routes to the exit are that much longer as a result."

The three-year funds cost the average of the ECB's benchmark interest rate, currently at a record-low 1 percent, over the period of the loans and banks have the option of repaying them after a year. Forecasts in the Bloomberg survey range from 300 billion euros to 750 billion euros. No further three-year operations are currently scheduled beyond next week.

Stronger Euro

The euro strengthened against the dollar today, rising above $1.34 for the first time since Dec. 9. The 17-nation common currency gained 0.3 percent to $1.3409 at 12:31 p.m. in Brussels. The Stoxx Europe 600 Index was up 0.3 percent to 264.93.

With the economy set to recover "gradually" this year, there are no signs of downside inflation risks that might justify cutting rates to zero, Executive Board member Benoit Coeure said in a speech published by the ECB today.

In Asia, Vietnam is making headway against the region's fastest inflation as prices rise the least in 11 months, giving the central bank scope to lower rates. Consumer prices climbed 16.44 percent in February from a year earlier, the General Statistics Office said in Hanoi today.

U.S. Recovery

In the U.S., purchases of new homes probably rose in January to a nine-month high, more evidence the housing market is improving, economists said before a report today.

The ECB's second offering of three-year loans is intended to relieve liquidity strains in the region as officials work to contain fallout from the debt crisis. The central bank has increased the pool of collateral that banks can use to obtain the loans.

Before the December operation, the ECB reduced the rating threshold for certain asset-backed securities. This month, it said seven of the 17 national central banks in the euro area will also accept credit claims, a move that ECB President Mario Draghi estimates will increase the collateral pool by another 200 billion euros. The aim is to give small and medium-sized banks greater access to ECB cash.

While the overall amount allotted next week may be lower than in the first operation, new borrowing should be higher, said Christel Aranda-Hassel, director of European economics at Credit Suisse in London.

New Money

That's because banks are likely to roll only about 100 billion euros of existing ECB loans into the three-year facility, with the remainder representing new cash.

In the December operation, about 296 billion euros of the 489 billion-euro total was accounted for by old loans, meaning about 193 billion euros was new money, according to Barclays Capital.

The size of the loans prompted German ECB council member Jens Weidmann to warn that the central bank mustn't "lose sight of its mandate" to control inflation by taking on "excessive risks."

Those concerns are likely to see the ECB wind down its long-term lending after the second three-year operation, said Deutsche Bank chief economist Thomas Mayer.

ECB council member Ewald Nowotny said today officials will "wait to see the effects" of the loans. "I personally don't see any further need for action," he said.

--With assistance from Shobhana Chandra in Washington, Jason Folkmanis in Ho Chi Minh City, Kristian Siedenburg in Vienna, Michael Shanahan, Anchalee Worrachate, Emma Charlton, David Goodman, Edward Evans, Lucy Meakin and Keith Jenkins in London, and Lukanyo Mnyanda in Edinburgh. Editors: Patrick G. Henry, Craig Stirling

To contact the reporters on this story: Matthew Brockett in Frankfurt at; Jeff Black in Frankfurt at

To contact the editor responsible for this story: Craig Stirling at

Europe’s banks bleed from Greek crisis

Friday, February 24, 2012 03:55:35 PM

LONDON/PARIS — Greece’s debt problems drove a slew of heavy losses across the European banking sector on Thursday, and bosses warned the eurozone crisis would continue to threaten earnings.

From France to Germany, Britain to Belgium, some of the region’s biggest banks lined up to reveal billions of euros lost through writedowns on Greek loans.

“We are in the worst economic crisis since 1929,” Credit Agricole chief executive Jean-Paul Chifflet said.

Credit Agricole reported a record quarterly net loss of €3.07 billion ($4.06 billion), performing worse than expected from the cost of shrinking its balance sheet and after a €220 million charge on its Greek debt.

Britain’s Royal Bank of Scotland has marked its Greek bonds at a 79 per cent loss — or £1.1 billion — for 2011. The state-owned bank posted a fourth quarter loss of nearly £2 billion on Thursday.

Problems in Europe’s banking sector are far wider than Greece, however. Germany’s Commerzbank, whose fourth-quarter earnings were spoiled by a €700 million hit on Greek sovereign debt, needs to find €5.3 billion to meet the stringent new capital requirements set by Europe’s banking regulator. It has now lost more than €2 billion on its Greek bonds.

Commerzbank said it could reduce some of its shortfall by shedding risky assets, though the debt crisis still had the potential to disrupt earnings.

Bailed out Franco-Belgian bank Dexia warned on Thursday it risked going out of business. It suffered a 2011 net loss of €11.6 billion, hit by its break-up and exposure to Greek debt and other toxic assets such as US mortgage-backed securities.

Dexia booked a €3.4 billion loss on its holding of Greek sovereign bonds. French investment bank Natixis reported a milder-than-expected 32 per cent decline in quarterly profits. Despite the weak results, banks still found room for bonuses.

Delinquent Property Loans at European Banks Total $1 Trillion

February 24, 2012, 11:17 AM EST
By Simon Packard

Feb. 24 (Bloomberg) -- European banks hold about 750 billion euros ($1 trillion) of delinquent real-estate loans, putting them under pressure to sell assets, according to a study by the European Business School.

Divestments by the banks will create “attractive” opportunities for buyers of loans or properties, particularly residential and retail buildings outside of prime locations, the Oestrich-Winkel, Germany-based school said in a report presented at its annual property conference.

By 2014, the shortfall in debt funding for maturing loans will rise to 200 billion euros as banks reduce their property- loan books and shrink balance sheets to meet higher capital requirements, according to the study. Non-core lending, financing not connected to a bank’s main businesses, totaled 1 trillion euros, half of it by German institutions, it found. That adds to pressure to sell loans and assets.

“The problem will take years to solve, but the process is under way,” said Ralph Winter, chairman of Corestate Capital AG. The Zug, Switzerland-based real estate asset manager sponsored the study, which was compiled by the business school’s Real Estate Management Institute.

--Editors: Ross Larsen, Andrew Blackman.

To contact the reporter on this story: Simon Packard in London at

To contact the editor responsible for this story: Andrew Blackman at

EU Bid to Control Bank Capital Rules Said to Face Challenge

February 24, 2012, 11:15 AM EST
By Jim Brunsden

Feb. 24 (Bloomberg) -- At least four nations may challenge European Union plans to limit their power to regulate bank capital as governments seek a compromise on implementing global rules on the reserves lenders must hold to prevent a financial crisis, according to four people with knowledge of the matter.

Officials from the EU’s 27 member states are weighing whether to scrap a proposal from EU financial services chief Michel Barnier to make the European Commission responsible for deciding bank capital levels during market turmoil, said the people, who declined to be identified because the talks are private. Nations are also considering widening the range of assets lenders may use to meet liquidity rules, the people said.

Barnier has been criticized by the U.K. and Sweden for seeking to restrain national watchdogs’s freedom to impose tougher capital rules on national banks. Barnier has said that requirements for lenders should be set by the EU, with limited exceptions for national regulators to exceed them to ease credit booms.

The commissioner included the curbs in a draft law he presented last year to implement rules set by the Basel Committee on Banking Supervision. Chantal Hughes, Barnier’s spokeswoman, declined to immediately comment.

“A move towards more flexibility in the application of the rules is to be welcomed,” Richard Reid, research director for the International Centre for Financial Regulation, said in an e- mail. “Across the EU there is a considerable diversity in the size and structure of financial systems.”

Capital Surcharges

The Basel committee brings together regulators from 27 countries including the U.S., U.K. and China to set global rules for banks. The committee last year said it would seek to impose capital surcharges of as much as 2.5 percentage points on the largest lenders as part of its response to the crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc.

Denmark, which holds the rotating presidency of the EU, is seeking a deal on the implementation of the Basel rules next month. It would then need to negotiate the final version of the measures with lawmakers in the European Parliament.

Barnier’s version would hand the European Commission power to set “stricter” capital rules for banks in cases where it’s necessary to address “risks which arise from market developments,” according to a copy of the document on the EU’s website. The rules would be temporary, although no expiry date is set out in the draft. The extra requirements could apply across the whole EU or in individual countries.

Raise Requirements

Nations are considering proposing changes to the law that would keep the power in the hands of their own regulators, the people said. Decisions to hike capital requirements may still be reviewed or coordinated at the EU level, they said.

“Forcing the whole EU into lockstep for the common good could lead to a suboptimal approach nationally,” Patrick Fell, a director at PricewaterhouseCoopers LLP in London, said in an e-mail. An approach based on local decisions “buttressed through coordinated EU review and disclosure” to the market, could be “more sustainable,” he said.

Adding powers to the draft law giving national regulators the ability to impose capital surcharges on banks with systemic importance is also being considered, the people said. On the liquidity rule, nations are considering amending a standard draft by the Basel committee that would require lenders to hold enough easy-to-sell assets to survive a 30-day credit squeeze.

Barnier’s proposal said regulators should assess which assets will count as highly liquid before 2015. Officials are considering calling on supervisors to test a wider range of securities than those set out by Basel, the people said. This list may include some equities, two of the people said.

Liquidity is a measure of the amount of cash and easily sellable assets banks have on hand to meet liabilities. A bank’s capital is a measure of the reserves it has to cover losses.

The debate about the liquidity requirements is “having to shift in recognition of the reality that there is a shortage in supply of suitable instruments for banks to use,” Reid said.

--Editors: Anthony Aarons, Keith Campbell

To contact the reporter on this story: Jim Brunsden in Brussels at

To contact the editor responsible for this story: Anthony Aarons at

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