A good article. The Italian sovereign crisis is far from over, but look for people to shift back their focus on the banks. It won’t just be speculators, it will be investors that are afraid that having relied on political help to stay afloat (directly and via support for sovereign debt) you don’t know what banks will be asked to do. Interbank funding is still difficult, and if the ECB really starts growing its balance sheet with sovereign debt, how much room will it have for banks? This is all very circular, but the magnitude of the problem is immense.
Look for attention to shift to Spain as well. While Italian bonds are rallying strongly, Spanish bonds are actually drifting lower. The 10-year Spanish bond is inching back towards a 6% yield in spite of the “risk on” spirit today. The housing bubble never really was addressed their and so far the problems at the Caja’s has remained below the mainstream headlines, but that can start getting more attention, though the Spanish ECB board member did speak out against being a lender of last resort for sovereigns, as their mandate was to be lender of last resort for banks.
French yields are actually up again today. Marginally, but still up. Liquidity is abysmal. Bonds that should have been trading with an 1/8 or smaller bid/offer spread, were being quoted with 1/2 point bid/offers. That is scary for something as “safe” and “liquid” as French government bonds. A lack of liquidity has been an ominous sign in other credit markets when it has appeared. Seems unbelievable to me that French debt could crack, but they have certainly left prudence behind and seem to believe their own views that somehow guarantees don’t count for the guarantor but should give the market a lot of comfort.
Talks of Eurobonds are resurfacing. Where would a 10-year Eurobond trade? I would guess at least 4%. Maybe as high as 4.25%. In theory it would be “joint and several” but no one is going to buy it close to Germany’s yield. I don’t think it would trade as tight as the “good” EFSF bonds that are out there. Maybe I am wrong, but I think the enthusiasm for how tight a Eurobond would trade is coming from people who would never buy or value a Eurobond. It would highlight to Germans how much they are paying to subsidize the other countries (including more and more, their French “partner”).
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Invisible Run on Banks Becomes Conversation With 7% Italy Yields
2011-11-11 00:00:49.599 GMT
By John Glover and Elisa Martinuzzi
Nov. 11 (Bloomberg) — Italy’s highest bond yields since
the birth of the euro are reverberating through the financial
system of Europe’s biggest debt issuer, driving lenders to seek
record amounts of central bank financing.
Italian banks borrowed 111.3 billion euros ($152 billion)
from the European Central Bank at the end of October, up from
104.7 billion euros in September and 41.3 billion euros in June,
Bank of Italy data show. The five biggest lenders — UniCredit
SpA, Intesa Sanpaolo, Banca Monte dei Paschi di Siena SpA, Banco
Popolare SC and UBI Banca ScpA — accounted for 61 percent of
the country’s use of ECB resources in September, almost double
the share in January.
After punishing Greece, Ireland and Portugal for their
rising debt loads, the bond market is now targeting Italy,
pushing bonds yields in the euro zone’s third-largest economy
above 7 percent as the nation’s lenders prepare to refinance
$120 billion of debt maturing next year. Italy’s $2 trillion in
liabilities exceed those three countries combined, plus Spain.
“The banks are deleveraging on a tightrope,” Alberto
Gallo, a credit strategist at Royal Bank of Scotland Group Plc
in London, said in an interview. The slump in Italy’s bonds,
which sent the 10-year yield soaring to as high as 7.48 percent
Nov. 9, is reducing the value of fixed-income securities held by
banks, eroding their value as collateral for loans, Gallo said.
Bill Rates
Bond investors charged the nation an interest rate of 6.087
percent yesterday to buy 5 billion euros of one-year bills, the
highest in 14 years. Greece, Ireland and Portugal sought a
bailout from the ECB, the European Union and the International
Monetary Fund after their bond yields rose above 7 percent amid
the region’s sovereign debt crisis.
As Italy’s government faces collapse after Prime Minister
Silvio Berlusconi promised to resign once Parliament approves
austerity measures, deputy finance ministers meeting at the
Asia-Pacific Economic Cooperation forum in Hawaii this week
expressed concern over the danger Europe poses to the world
economy.
U.S. Treasury Undersecretary for International Affairs Lael
Brainard said European officials must speed up construction of a
“firewall” to protect countries that have sound policies. The
17-nation euro has fallen as much as 5.4 percent since Oct. 27.
International Monetary Fund fiscal monitors are due to
visit the Italian capital, and European Union Economic and
Monetary Affairs Commissioner Olli Rehn says he wants answers to
“very specific questions” on economic pledges by the weekend.
U.K. Prime Minister David Cameron said Italian interest rates
are “getting to a totally unsustainable level.”
Yield Spreads
The extra yield investors demand to hold Italian 10-year
debt rather than German bunds rose to a euro-era record 5.53
percentage points on Nov. 9 before falling back to 5.12
percentage points.
Italy’s top 32 banking firms have about 88 billion euros,
or 3.2 percent of their liabilities, maturing in 2012, according
to the Bank of Italy. Next year’s maturities coincide with about
307 billion euros of the government’s debt coming due, the most
ever, according to data compiled by Bloomberg.
Italian lenders are seeking to broaden their sources of
funding. Corrado Passera, the chief executive officer of Intesa
Sanpaolo SpA, said on Nov. 8 the bank can do without wholesale
funding for all of next year, and rely on deposits and bonds it
sells to individual customers.
Rising Cost
Retail funding made up 54.1 percent of the Italian banking
system’s total as of June, compared with 48.8 percent in the
rest of the euro zone, according to the Bank of Italy.
The cost of that money increased 0.4 percentage point, or
40 basis points, to 1.7 percent in the nine months ended Sept.
30 as the funding mix shifted to products such as repurchase
agreements and fixed-term deposits that pay clients more,
central bank data show.
Italian banks’ share of ECB lending rose to about 19
percent of the total in October, according to the Bank of Italy.
That’s up from 15 percent, or 91 billion euros, in September,
the data show.
“The Italian banks are trapped,” said Roger Doig, a
London-based analyst at Schroders Plc, which manages about $58
billion in fixed-income assets. “They are where they are and
that’s with the Italian sovereign. The austerity required if the
sovereign wants to remain in the euro zone means there’s going
to be a recession, which will mean losses for the banks.”
Default Swaps
Credit-default swaps tied to the senior debt of UniCredit,
a proxy for the cost of funding at Italy’s biggest lender,
jumped 150 basis points this month to 502 basis points,
approaching the record 504 reached in September. Contracts on
Intesa Sanpaolo, the second-largest, jumped 129 to 467, also
close to an all-time high, according to CMA in London.
Five-year contracts on Italy were little changed at a
record 570 basis points, up from 239 at the beginning of the
year, according to CMA.
Credit-default swaps typically decrease as investor
confidence improves and rise as it deteriorates. They pay the
buyer face value if a borrower fails to meet its obligations,
less the value of the defaulted debt. A basis point equals
$1,000 annually on a contract protecting $10 million of debt.
“The market is pricing in an Italy event and assuming that
Italy fails,” said Patrick Lemmens, a senior money manager who
helps oversee about $13 billion, including Intesa Sanpaolo
shares, at Robeco Groep in Rotterdam.
Deposit Growth
Household deposits in Italy still are expanding “at a
moderate pace,” according to the Bank of Italy. That’s a
contrast to withdrawals seen in Greece, Ireland and Portugal.
The annual rate of decline in Irish private-sector deposits
was 10.5 percent at the end of September, according to that
nation’s central bank. In Greece, deposits fell 2.9 percent in
September for a net outflow of 6.29 billion euros, the biggest
one-month drop since the start of the crisis, according to Manos
Giakoumis, research director at Euroxx Securities SA, an Athens-
based brokerage.
Italy’s lenders started increasing their reliance on the
ECB in July, when end-of-month borrowings from the central bank
minus the amount deposited reached 58.8 billion euros, according
to John Raymond, an analyst at CreditSights Inc. in London.
Before that, net borrowings from the ECB ranged from 9 billion
euros to 30 billion euros, he said.
The amount surged to a record 87 billion euros at the end
of October, according to Raymond, citing Bank of Italy figures.
“This is all symptomatic of what’s going on around the
banks,” Raymond said. “Everything hinges on the sovereign.”
Contracting Economy
RBS economists forecast a recession in Italy in the fourth
quarter, and expect the economy to contract 0.2 percent in 2012.
The government’s austerity packages, totaling 124 billion euros
and including cuts to health care, pensions and regional
subsidies, are adding to the recession risk, said RBS’s Gallo.
Italian institutions can borrow what they need in the ECB’s
refinancing operations, paying the current policy rate of 1.25
percent as long as they have the required collateral. Lenders
have “ample availability” of ECB-eligible assets, according to
the Frankfurt-based central bank, and can help themselves by
ensuring the assets are suitable as security.
Intesa Sanpaolo said it’s looking to increase ECB-eligible
assets to 100 billion euros from the current 83 billion euros.
The ability to fund at the ECB is vital for Italy’s banks
that can’t access markets, though the central bank is keen to
wean borrowers from its support. The ECB applies a discount on
securities used as collateral to protect itself against loss.
“Italian banks have been crushed in the carnage in the
government bond market,” said Suki Mann, a strategist at
Societe Generale SA in London. “It could get worse.”
For Related News and Information:
Top bond stories: TOP BON <GO>
Top financial news: TOP FIN <GO>
Credit-default swap monitor: GCDS <GO>
Europe sovereign crisis monitor: CRFIS <GO>
–Witrh assistance from Simon Kennedy in Paris. Editors: Andrew
Reierson, Paul Armstrong
To contact the reporters on this story:
John Glover in London at +44-20-7073-3563 or
johnglover@bloomberg.net;
Elisa Martinuzzi at +39-02-8064-4218 or
emartinuzzi@bloomberg.net
To contact the editors responsible for this story:
Paul Armstrong at +44-20-7330-7185 or
parmstrong10@bloomberg.net;
Edward Evans at +44-20-7073-3190 or
eevans3@bloomberg.net
