ECB buys governments time on banks as Greek default risk looms
The European Central Bank’s move to keep euro-area banks afloat is buying governments more time to recapitalize them as Greece edges closer to default.
The ECB said Thursday it will reintroduce year-long loans, giving banks access to unlimited cash through January 2013, and resume purchases of covered bonds to encourage lending. At the same time, the European Commission is pushing for a coordinated capital injection into banks and German Chancellor Angela Merkel said policy makers “shouldn’t hesitate” if it turns out financial institutions are undercapitalized.
“Politicians, including Angela Merkel, have finally realized the urgency in protecting banks as a Greek default can no longer be ruled out and no-one wants a Lehman in Europe,” said Christoph Kind, head of asset allocation at Frankfurt Trust, which manages $24 billion. “From its side, the ECB is making sure that banks won’t face funding issues throughout that period.”
Financial shares advanced after Merkel fed speculation that policy makers are working on plans to boost bank capital to stem the spread of the sovereign debt crisis. Europe’s rescue fund, the European Financial Stability Facility, could be relied upon as a last resort to bolster banks if needed, she said, adding Germany is ready to discuss possible bank aid at this month’s European Union summit.
Germany’s Deutsche Bank on Oct. 4 scrapped its profit forecast and announced 500 job cuts and further writedowns on Greek bond holdings, while Belgium’s Dexia is facing its second bailout in three years.
European leaders are under pressure from global counterparts to find a solution to the debt crisis as it threatens to tip the world economy back into recession. EU leaders hold a summit on Oct. 18 followed by a meeting of the Group of 20 on Nov. 3-4.
The ECB’s measures buy banks “a lot of time as Europe is basically moving toward recapitalizing the sector,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group in London. “Where the ECB can and does contribute very aggressively is to breaking the nexus between the sovereigns and the banks.”
The ECB will spend 40 billion euros ($53 billion) on covered bonds from next month and offer banks two additional unlimited loans of 12- and 13-month durations, President Trichet said at a press conference in Berlin after leaving the benchmark interest rate at 1.5%. The ECB will continue to lend banks as much money as they need in its regular refinancing operations at least until July 2012.
The ECB used the same measures during the global financial crisis to avert a credit crunch.
The 2.5 trillion-euro market for covered bonds -- assets backed by mortgages or public-sector loans -- underpins much of Europe’s real estate lending, which almost ground to a halt in the wake of Lehman Brothers Holdings Inc.’s collapse in September 2008.
Banks’ overnight deposits with the ECB jumped to the most in more than a year this week as concern about other institutions’ sovereign debt holdings discouraged them from lending to each other.
