They'll just hoard it.
Banks Grow Leery Over Lending
By DAVID ENRICH, SARA SCHAEFER MUñOZ and ADAM BRADBERY
Mounting jitters about the health of European economies and banks are making it more costly for some financial institutions to fund daily operations, a situation with unsettling parallels to the 2008 credit crunch that slammed stocks and led to a sharp decline in global growth.
With fears intensifying that Greece's financial crisis could spread to countries like Spain, Italy and Portugal, banks in the U.K. and continental Europe appear to have grown more leery about lending to other banks, especially those heavily exposed to countries facing challenging fiscal situations. In addition, banks have been trying to unload sovereign debt from troubled euro-zone countries, but they are finding little interest.
Much of the concern stems from the European Union's long struggle to solve the Greek fiscal crisis. Last weekend's €110 billion rescue package seemed to only feed market concerns about default and sovereign-debt contagion throughout the region. Moreover, seething civil unrest in Athens fed the sense of crisis that has few good solutions.
Friday night, European Union leaders and Group of Seven finance ministers conferred on the state of financial markets, which included the free fall in U.S. stocks late Thursday that quickly reversed. The move was chalked up to computer or human error, but the explanations did little to soothe already nervous banks. Late Friday, chatter of a big policy move aimed at soothing financial markets helped the euro and government bonds rally.
In a sign of the increasingly tight funding market, costs of interbank lending spiked Friday to levels not seen since mid-2009. Other risk metrics, including rising costs for credit-default insurance for financial institutions and falling yields on German bunds, underscored the stress in the financial system. Given those indications, banks have quickly gotten much more cautious.
"We're back to defending the castles, pulling resources inwards," said David Havens, managing director of credit trading at Nomura Securities International Inc. in New York.
Squeamishness among banks and investors hasn't approached the scale of the liquidity crisis that precipitated the global financial crisis in fall 2008, but the trend has rattled investors.
Global stock markets and bank stocks, in particular, retreated over the past week. European shares had their worst week in 18 months, while the U.S., Japanese and Chinese stock markets also recorded sharp losses. Italian banks skidded Thursday, and on Friday shares of France's Société Générale SA slid 8%, the U.K.'s Barclays PLC fell 6%, and Spain's Banco Santander SA fell about 4%.
"The risk that we move towards a liquidity-crunch situation is substantial," said Marco Annunziata, chief economist at UniCredit Group. "I don't think it's a high risk at this stage, but tensions are mounting rapidly and it's definitely something that one should be prepared for."
Meanwhile, an index that tracks the average price of insuring against a default by banks—a gauge of the industry's perceived riskiness—soared to its highest levels since March 2009, when the financial crisis reached panic lows, according to financial-data provider Markit.
Market experts said the bank-funding pressures are one reason global markets are sliding.
"As funding strains prompt institutions to liquidate assets, they can easily transform into a broader financial-market contagion," SocGen analysts said in a note on Friday titled "European funding crisis goes global." They said the phenomenon was partly responsible for Thursday's plunge in stock markets, which continued into Friday.
The situation is adding to pressure on central banks to step in with some sort of relief package that reduces pressure on fiscally challenged governments and struggling banks to defuse the brewing crisis.
"It will take a strong and committed political and central-bank action so uncertainty is reduced," HSBC Holdings PLC finance chief Douglas Flint said Friday after his bank released upbeat first-quarter results. "We are in for choppy waters until market confidence returns."
The Fed is weighing whether to reopen a lending program put in place during the financial crisis in which it shipped dollars overseas through foreign central banks like the European Central Bank, Swiss National Bank and Bank of England. The central banks, in turn, lent the dollars to banks in their home countries in need of dollar funding.
The Fed has felt that it is premature to reopen this program—which was shut down in February as the financial crisis appeared to wane—because it wasn't clear that foreign banks were in need of dollar funds. Still, trading floors on Wall Street were abuzz Friday with anticipation that the Fed might use the program again.
While most interbank lending remains active, the costs of such loans have risen in recent weeks, a sign that banks are getting more cautious with one another. That trend has accelerated this past week. On Friday, the three-month London interbank offered rate, or Libor, jumped to 0.42813%, from 0.37359% on Thursday, the highest level for the measure since last August.
Nervousness about the Spanish economy and that country's fiscal problems have caused borrowing costs for banks like Santander to balloon, according to traders and bankers. Spain is battling high unemployment, a real-estate downturn and a raft of trouble among smaller banks.
Some of Santander's long-term bond yields rose sharply compared with certain benchmark euro yields this past week, indicating that markets see the bank's bonds as higher-risk. Also, the cost of buying insurance against Santander defaulting on its debt jumped on Friday to a five-year high.
Santander's finance chief, José Antonio Álvarez, acknowledged the bank's borrowing costs recently have risen, but he said the trend won't have a significant impact on the company's bottom line. He emphasized that Santander's roughly €27 billion in exposure to government debt in Spain, Greece and Portugal is negligible in the context of its €1.1 trillion balance sheet.
Santander has long been perceived as relatively healthy. That has made the recent elevation of its funding costs especially noteworthy to traders and bankers.
Printed in The Wall Street Journal, page B1 |
