Banking woes

The strength of demand for ECB lending is continuing to paint a worrisome snapshot of market sentiment, particularly with respect to the banking sector.  Admittedly, banks’ have reduced their demand for 3 mth USD funding from the ECB but despite the strength of demand for the ECB’s 3 yr loans last month overnight borrowing levels from the ECB remain extremely strong. 

Inevitably this will heighten the speculation about which banks are under particular stress.  It is the heightened levels of mistrust in the banking sector which will have contributed to the sharp falls in UniCredit shares yesterday but this morning the majority of Eurozone bank shares are trading lower. 

Austrian banks are been rattled by worrisome news stemming from Hungary.  While Italian and Austrian banks provided an equal amount of the original FDI into CEE banks as they were nationalised in the 1990s, as a percentage of GDP Austria is far more exposed to the region.  Using BIS data Hungarian claims on Austrian banks amount to around 10% of Austria’s GDP.   Warnings from the Greek PM that a messy default could happen as soon as March if the unions do not agree to further pay cuts is also very unsettling news.  

It is against the backdrop of elevated stress levels in the banking sector that Eurozone governments hope to sell an estimated EUR865 bln of debt in 2012.  Germany’s bund auction yesterday passed without event but the market will be far more sensitive to the results of today’s French debt auction in an environment fired up even more by widespread speculation that France’s AAA credit rating is all but lost already.  The results of the French debt auction this morning will set the tone for the rest of the session and perhaps for the rest of the week.  Going into the auction the EUR is coming under heavy selling pressure.  A break of EUR/USD1.2855 could see a move towards 1.2780.

source: Rabobank