ECB Wants To Close Money Floodgates
Reuters) – The European Central Bank wants its second offer of cheap ultra-long funds next week to be its last, putting the onus back on governments to secure the euro zone’s longer-term future.
Powerful members of the central bank’s 23-man governing council are privately hoping demand at the February 29 auction will fall well short of the 1 trillion euros some expect, backing their view that it should be the last.
Central bank sources say they are worried that banks will become too reliant on ECB funds, removing the incentive to restart lending between themselves.
The ECB first offered banks low cost three-year money in December to stave off a freeze in interbank lending that threatened to make the region’s debt crisis much worse.
Banks flocked to take advantage of the offer, filling their coffers, and ECB President Mario Draghi said “a major, major credit crunch” had been averted.
Some European officials have been hoping the central bank would carry on supporting the economy with a series of subsequent cheap money auctions, known as LTROs.
But the ECB wants to keep pressure on governments to improve their defense of the euro zone with better economic policies and by bolstering their European Stability Mechanism (ESM) firewall which will come into being by mid-year.
Making hundreds of billions of euros easily available to banks over a three-year period also risks fuelling a credit binge that some central bankers worry could push up inflation.
The ECB funneled banks nearly half a trillion euros in cash at the first operation on December 21. A Reuters poll of over 60 economists showed a mid-range expectation for it to allot another 492 billion euros next week with some expecting up to a trillion to be taken.
The first LTRO, or longer-term refinancing operation, has already eased market pressures.
Borrowing costs for Italy and Spain – at the epicenter of the crisis last year – have fallen, while parts of the interbank lending market have reopened and stock markets have rallied.
Only 15 out of 63 analysts polled by Reuters said banks would bid in the second auction because they needed the cash to shore up their own balance sheets. But with the money costing just one percent, bid they will.
ECB officials accept they have to help the banking sector but they also want to send a message that the unprecedented liquidity provision will end.
Bundesbank chief Jens Weidmann has warned that “too generous” supply of liquidity could create risky incentives for banks, which could in turn store up future inflation risks.
Bank of Finland chief Erkki Liikanen is also worried about ample liquidity provision leading to future problems and has said the ECB must think about how to unwind the extraordinary measures. Other senior policymakers are concerned too.
If banks used the first LTRO to plug their funding needs and fend off a credit crunch, ECB officials hope they could use the second more aggressively to buy higher-yielding bonds, especially from Italy.
Anecdotal evidence suggests banks in Spain used the first LTRO to make most use of this “Sarkozy trade” – a term adopted by markets after the French president suggested governments look to banks that tapped the ECB operation to buy their bonds.
Italy faces a debt issuance hump in the next few months and could do with the second LTRO fuelling demand for its debt. It needs to sell around 45 billion euros of its bonds a month in both March and April versus 19 billion in February.
John Fitzgerald of the Economic and Social Research Institute, a Dublin-based think tank, said further long-term funding from the ECB beyond February may not be necessary.
“Once they have got Spain and Italy over the line in terms of refinancing needs, with much of this refinancing set to be done by March, the need for the LTRO may well disappear,” said Fitzgerald, who also sits on the Irish central bank’s board.
“The ECB will be able to breath a sigh of relief. It appears this mechanism was enough to turn the markets and that the risk of a collapse in the system is less today.”
While ECB officials expect the second LTRO to give a boost to lending as well as bond-buying, they are nonetheless worried about banks becoming dependent on the ECB or heightened liquidity provision leading to irresponsible banking decisions.
Some at the ECB believe banks should now be redoubling their efforts to raise fresh capital, as UniCredit recently did through its rights issue, and fear the ECB’s help will create zombie banks reliant on central bank support.
The ECB is also concerned the interbank market is not yet functioning fully. Bankers themselves see this concern.
“If you are flooding the market with cheap refinancing then there comes a point when you are preventing the market from working because nobody is going to borrow from another bank at X percent if they can borrow from the ECB at Y percent,” said a senior banker at a leading global bank.
The ECB expects governments to take responsibility for banks that prove too weak to help with extra liquidity and believes states should step in if, in three years when the funding term comes to an end, they are incapable of repaying the credit.
And while governments have made progress dealing with budgets, growth and economic governance, the ECB wants them to bolster the firewall provided by the EFSF and ESM bailout funds and is looking for progress at a March 1-2 meeting of leaders.
This puts the onus squarely on governments, led by euro zone paymaster Germany, to respond to the debt crisis once the ECB has unleashed its second three-year lending operation.
This may come as something of a shock to some banks and officials. One senior EU official said he had expected the ECB would offer banks a third round of long-term funding.
“We expected a third,” he said. “They (ECB) have always said they will keep an eye on how the market is evolving. My guess is that they are hedging their bets.
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China Big Bank Lending Drops In Feb
SHANGHAI, Feb 22 (Reuters) – China’s four biggest state-owned banks extended about 70 billion yuan ($11.1 billion) in new local-currency loans from Feb. 1-19, suggesting a big drop in lending, the Shanghai Securities News reported on Wednesday.
With just ten more days remaining in February after that period, the figure suggests lending by the biggest banks, which typically accounts for 30-40 percent of overall new loans, could drop significantly for the month.
State media reported earlier this month that new lending by the Big Four totalled 320 billion yuan in January, just over 40 percent of a total of 738.1 billion yuan in new loans by Chinese banks that month.
The big four state-run banks are Industrial and Commercial Bank of China Ltd , China Construction Bank Corp , Bank of China Ltd and Agricultural Bank of China Ltd .
Total lending, including other Chinese banks, could still exceed the January figure, the paper said, citing unnamed bank sources.
Despite the apparent drop in lending by the big banks in the first part of the month, it is possible that credit extensions could surge in the final days of February. Banks sometimes book lending in spurts of several days, and the cut in required reserves by the central bank, which goes into effect on Friday, could boost lending.
The central bank lowered the amount of cash banks must hold in reserve on Saturday, boosting lending capacity by an estimated 350-400 billion yuan.
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European Stocks Fall On Service’s PMI
European stocks fell for a second day and commodities declined after a gauge of the region’s economy unexpectedly shrank. U.S. equity-index futures dropped, while German bonds gained.
The Stoxx Europe 600 Index lost 0.8 percent at 8:40 a.m. in New York. Futures on the Standard & Poor’s 500 Index slipped 0.2 percent. Copper retreated 0.9 percent. The German 10-year bund yield decreased three basis points to 1.95 percent, snapping a four-day climb. The dollar appreciated 0.7 percent to 80.30 yen, while the pound declined against 15 of its 16 major peers.
A purchasing-managers index of euro-area services and manufacturing dropped to 49.7, London-based Markit Economics said, below the 50.5 forecast by economists in a Bloomberg survey. China’s manufacturing may shrink for a fourth month, according to data from HSBC Holdings Plc and Markit. U.S. sales of previously owned homes probably rose last month to the highest level since May 2010, analysts said before a National Association of Realtors report today.
“There are still concerns regarding the European economy,” said Benoit Peloille, equity-market strategist at Natixis in Paris. “The outlook for growth remains soft because the austerity measures are weighing and banks are tightening credit conditions.”….
Asian Markets Muted By Sluggish Chinese HSBC PM
Benchmark oil hovered above $106 per barrel while the dollar rose against the euro and the yen.
Japan’s Nikkei 225 index added 0.8 percent to 9,540.78 while Hong Kong’s Hang Seng slipped marginally to 21,460.91. South Korea’s Kospi was down 0.2 percent to 2,021.41. Australia’s S&P/ASX 200 was slightly higher at 4,293.24.
Benchmarks in mainland China, Taiwan, Malaysia and the Philippines rose. New Zealand, Singapore and Indonesia fell.
The preliminary reading of HSBC’s China manufacturing indexrose from 48.8 in January to 49.7 in February. But the number was still below the 50-level that signifies expansion and suggested that the Chinese central bank may loosen credit — a move typically welcomed by markets.
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Greek Rescue Still Leave Default Alive
Europe is still struggling to avoid the threat of default as investors warned Greece will soon risk violating the terms of its second bailout in three years.
Seven months of negotiations ended in the pre-dawn hours in Brussels with Greece winning 130 billion euros ($172 billion) in aid it needs to avoid a March bankruptcy. Any respite may prove temporary after it signed up to a program of austerity and economic reform aimed at slashing debt to 120.5 percent of gross domestic product by 2020 from about 160 percent last year.
Even with investors and central bankers chipping in to relieve the debt burden, economists from Citigroup Inc. to Commerzbank AG concluded Greece may again fail to deliver amid a fifth year of recession, looming elections and social unrest. The upshot could be the removal of aid and renewed debate over the merits of fresh assistance before year-end as policy makers shift toward doing more to inoculate the rest of Europe.
“The bailout bandage is on, but it won’t take much to unravel,” said David Miller, partner at Cheviot Asset Management in London. “The euro zone has done its best to ensure that Greece will deliver on promises, but there is considerable scope for backtracking on deficit reduction….
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WASHINGTON – US President Barack Obama will meet Israeli Prime Minister Benjamin Netanyahu at the White House on March 5, as a potential Israeli strike on Iranian nuclear sites has become a hot topic in Washington, the White House said on Monday.
Tom Donilon, the president’s national security advisor who just concluded a three-day visit to Israel, relayed to Netanyahu that Obama “looks forward to meeting with him,” the White House said.
In his consultations with senior Israeli officials including Netanyahu, Defense Minister Ehud Barak, Chief of the General Staff Benny Gantz and National Security Advisor Yaakov Amidror, Donilon addressed the “full range of security issues of mutual concern,” the White House said in a statement.
Donilon’s visit is referred as part of the “continuous and intensive dialogue” between the two countries which reflects unshakable US commitment to Israel’s security. Late last month, Martin Dempsey, chairman of the US Joint Chiefs of Staff, traveled to Israel.
Last Thursday, Netanyahu called Iran “the most irresponsible” country in the world, saying sanctions against Tehran over its controversial nuclear program “haven’t worked”. Israel also accused Iran of being behind the recent bomb attacks on its embassy personnel in India, Georgia and Thailand.
US Defense Secretary Leon Panetta was quoted as saying early this month that Israel could attack Iran as soon as this spring.