ECB - banking angst

Over 500 banks tapped the ECB's LTRO yesterday.  This appears to have brought home the extent of the difficulties faced by the banking sector. Clearly, while the sector as a whole is under pressure not all of these banks will be under severe stress. 

The combination of cheap funding on offer and the assurances by officials that there should not be a stigma attached to the loans will, for many banks,  have made the auction too attractive to ignore particularly given the uncertainties that 2012 could hold.  That said the ECB would not have acted in this manner if conditions in the banking sector were not very strained. 

The stresses in the money market have been obvious for some time, the rhetoric of central bankers in the past few months has been very sobering and there were also many signs that demand for funds yesterday would be high.   On the positive side, it is now very unlikely that a Eurozone bank will fail in the coming months due to purely to liquidity reasons.  The ECB has potentially spared the broader Eurozone economy from some bad news from the banking sector next year and this should offer some reassurance.  
 
The ECB has acted forcefully to ease liquidity conditions and improve the balance sheets of banks.  This is an important step in alleviating some of the symptoms of the crisis.  However, the action will not be sufficient to staunch the problems faced by various Sovereigns.  Many banks will remain wary of increasing their exposure to the debt of stressed governments in spite of the attractive pick up in yield that is on offer. 

That said, a newswire report that Italian banks tapped EUR116 bln or 23% of the 3 yr LTRO does offer some comfort heading into 2012 and Italy’s large funding requirement.  Italian banks are far more likely to buy Italian debt since there will be less concerns about currency denomination should EMU not stay the course. 

The Italian Senate is expected to vote and pass Monti’s budget today.  This will provide a little further relief but it won’t alter the fact the Eurozone crisis remains on full throttle.  The ability of Italy to place the huge quantity of debt that is up for grabs next year will be a crucial test for Italy, EMU and the EUR.  For now the EUR remains a very vulnerable currency, though the EUR/USDD1.30 level is providing a base for now.


source: Rabobank