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Sunday, November 25, 2007 8:24:23 PM
WSJ: Financing Options Dry Up in Europe
For Banks, the Hurt Just Goes On
Options for Financing
Drying Up in Europe;
Short-Term Rates Jump
By CARRICK MOLLENKAMP and MARK WHITEHOUSE
November 26, 2007
European banks are facing a new wave of financing troubles as the markets where they borrow money take a turn for the worse.
Interest rates in short-term lending markets have risen at a pace not seen since August as investors shy away from risk and banks become increasingly wary of lending to one another. The trouble has spread to areas that hadn't been severely affected -- including the €2 trillion ($3 trillion) market for covered bonds, an equivalent of the U.S. mortgage-backed-securities market that was seen as among the safest.
In an effort to ease the pain, central bankers are stepping in with emergency cash injections.
"There's a genuine fear here of bank failure, which I don't think there was in August," said Tim Bond, strategist at Barclays Capital. "The banking system's range of financing options is either very narrow or very expensive."
Analysts see a number of factors driving the latest bout of stress in lending markets. For one, banks are hoarding cash as insurance against potential losses on securities backed by subprime home loans, many of which still are held in off-balance-sheet investment funds -- known as conduits and structured investment vehicles -- for which the banks could be forced to take responsibility.
_______________________________________________________
CREDIT CRUNCH
• The Situation: European banks are facing financing troubles as credit-market jitters grip the system.
• The Nitty-Gritty: Interbank lending rates have shot up and other funding sources, like covered bonds and commercial paper, have tightened as well.
• Quotable: "There's a genuine fear here of bank failure, which I don't think there was in August," says Tim Bond, Barclays Capital strategist.
_______________________________________________________
Anxiety about losses on subprime investments also has hit money-market mutual funds, which have been an important source of financing for the conduits and SIVs. Amid concerns they could face massive withdrawals from their own investors, the funds are shying away from IOUs issued by both the banks and their investment vehicles.
"Liquidity, specifically cash, is king right now," wrote analysts at Lehman Brothers Holdings Inc. in a recent report. "If you do not have it, and need to access the capital markets, you are likely to have to pay dearly in the current environment."
As in August, the short-term interest rate at which banks lend money to one another -- known as the London interbank offered rate, or Libor -- has increased sharply. The three-month U.S. dollar rate reached 5.04% Friday, up from 4.87% on Nov. 13. The three-month euro rate was quoted at 4.6975% on Friday, up more than 0.1 percentage point from a week earlier -- the sharpest rise in that rate since August.
If sustained, the jump in interest rates could take a further bite out of economic growth in the euro zone, which already is struggling with the effects of a strengthening currency. Indeed, the latest purchasing manager's index -- a measure of private-sector activity -- fell in November to its lowest point in 27 months, according to NTC Economics. The data "point to the euro-zone economy increasingly faltering in the face of the credit crunch, strong euro, elevated oil prices, higher interest rates and softer growth in key export markets," said Howard Archer, an economist at Global Insight.
And a recent research report from J.P. Morgan Chase & Co. suggests the recent tightening in the euro interbank lending rate represents at least as much of a drag on the economy as the rise in the value of the euro against the dollar.
The mounting troubles in lending markets prompted the European Central Bank to say Friday that it will pump in extra funds through the turn of the year, if necessary. Tomorrow, the ECB is expected to supply more than the usual amount of short-term loans to euro-area banks during its weekly refinancing operation, following an operation Thursday in which it provided an added €60 billion in three-month loans. The central bank uses the increase or decrease of funding to keep the rates that banks charge one another for short-term loans close to its 4% target.
Investors expect the ECB will keep its key policy rate steady at 4% through 2008 amid rising inflation, even as growth slows. A growing minority of economists suspect the market upheaval, the strong euro and the U.S. slowdown will push the ECB to cut its rate by a quarter percentage point, perhaps as early as March.
The actions by central bankers haven't been limited to Europe. Last week, the Bank of Canada injected $3 billion in short-term loans, signaling that money markets remain strained throughout the developed world. Banks are hoping more liquidity arrives next month in the form of stepped-up repurchase agreements organized by the Federal Reserve and the ECB, according to a person familiar with the situation.
In an unusual sign of stress, banks are offering to pay well above publicly quoted interest rates for short-term loans. In the Euro commercial-paper market, where banks and companies issue IOUs to investors such as money-market funds, some banks are willing to pay as much as 0.2 percentage point more than Libor, according to a person familiar with the market. Still, the market contracted by $41 billion in the first three weeks of November as investors shied away, according to Capital Market Daily.
In recent days, investor anxiety has spread to the market for covered bonds, which had been the last remaining option for many European banks looking to tap capital markets. The market has long been a major source of financing for public-sector banks and mortgage lenders throughout Europe, including troubled United Kingdom mortgage lender Northern Rock PLC. The market emerged from the summer's credit turmoil relatively unscathed because it was seen as ultrasafe: Covered bonds must meet stringent requirements for the quality of loans backing them and must carry further guarantees from issuers.
As banks' other options for financing have dried up, they have increasingly turned to the covered-bond market. In October, there were 73 global covered-bond deals for $36.9 billion, the second-highest monthly volume of the year, according to research firm Dealogic. November volume as of Thursday had reached 47 deals for a total of $23.8 billion. Investors were expecting a further flood of issuance that would have increased yields and lowered prices.
Last week, investor demand cooled as Moody's Investors Service said it planned to review the rating of covered bonds issued by Northern Rock -- a rare event in the more-than-century-old market. As the market grew more volatile, a European bond council suspended price quotations among banks that had served as primary buyers and sellers of covered bonds.
Lack of investor interest has forced a number of banks -- including Allied Irish Banks PLC's AIB Mortgage Bank and Abbey National, a U.K. subsidiary of Spain's Banco Santander SA -- to postpone planned bond issues.
Citing the slackened demand, Barclays Capital said issuance last week totaled just €1 billion and called it an "overnight U-turn in primary covered-bond market sentiment."
Ted Packmohr, senior covered-bond analyst at Dresdner Kleinwort in Frankfurt, said the market's closure could become a serious problem if it lasts into next year, when issuance typically picks up as banks return to the market. Among the hardest hit would be Spanish and U.K. banks, which had relied more heavily than others on the market.
"How big a deal this is actually going to be depends on how long the market will remain shut," said Mr. Packmohr. He and other analysts expect the freeze to last through the end of the year.
--Joellen Perry and Paul Hannon contributed to this article.
Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com and Mark Whitehouse at mark.whitehouse@wsj.com
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• Euro-Zone Banks Hoard Cash, Prompting ECB to Take Steps
• Rescue Readied By Banks Is Bet To Spur Market
• Banks May Pony Up $60 Billion for SIVs
• Two Views on Hung Loans
Blog Posts About This Topic
• byzantine_ruins @ 2007-11-25T14:12:00 byzantine-ruins.livejournal.com
• The Finance Round-Up: November 23rd 2007 canada.theoildrum.com
More related content Powered by Sphere
http://online.wsj.com/article/SB119602868667303311.html?mod=hps_us_whats_news
For Banks, the Hurt Just Goes On
Options for Financing
Drying Up in Europe;
Short-Term Rates Jump
By CARRICK MOLLENKAMP and MARK WHITEHOUSE
November 26, 2007
European banks are facing a new wave of financing troubles as the markets where they borrow money take a turn for the worse.
Interest rates in short-term lending markets have risen at a pace not seen since August as investors shy away from risk and banks become increasingly wary of lending to one another. The trouble has spread to areas that hadn't been severely affected -- including the €2 trillion ($3 trillion) market for covered bonds, an equivalent of the U.S. mortgage-backed-securities market that was seen as among the safest.
In an effort to ease the pain, central bankers are stepping in with emergency cash injections.
"There's a genuine fear here of bank failure, which I don't think there was in August," said Tim Bond, strategist at Barclays Capital. "The banking system's range of financing options is either very narrow or very expensive."
Analysts see a number of factors driving the latest bout of stress in lending markets. For one, banks are hoarding cash as insurance against potential losses on securities backed by subprime home loans, many of which still are held in off-balance-sheet investment funds -- known as conduits and structured investment vehicles -- for which the banks could be forced to take responsibility.
_______________________________________________________
CREDIT CRUNCH
• The Situation: European banks are facing financing troubles as credit-market jitters grip the system.
• The Nitty-Gritty: Interbank lending rates have shot up and other funding sources, like covered bonds and commercial paper, have tightened as well.
• Quotable: "There's a genuine fear here of bank failure, which I don't think there was in August," says Tim Bond, Barclays Capital strategist.
_______________________________________________________
Anxiety about losses on subprime investments also has hit money-market mutual funds, which have been an important source of financing for the conduits and SIVs. Amid concerns they could face massive withdrawals from their own investors, the funds are shying away from IOUs issued by both the banks and their investment vehicles.
"Liquidity, specifically cash, is king right now," wrote analysts at Lehman Brothers Holdings Inc. in a recent report. "If you do not have it, and need to access the capital markets, you are likely to have to pay dearly in the current environment."
As in August, the short-term interest rate at which banks lend money to one another -- known as the London interbank offered rate, or Libor -- has increased sharply. The three-month U.S. dollar rate reached 5.04% Friday, up from 4.87% on Nov. 13. The three-month euro rate was quoted at 4.6975% on Friday, up more than 0.1 percentage point from a week earlier -- the sharpest rise in that rate since August.
If sustained, the jump in interest rates could take a further bite out of economic growth in the euro zone, which already is struggling with the effects of a strengthening currency. Indeed, the latest purchasing manager's index -- a measure of private-sector activity -- fell in November to its lowest point in 27 months, according to NTC Economics. The data "point to the euro-zone economy increasingly faltering in the face of the credit crunch, strong euro, elevated oil prices, higher interest rates and softer growth in key export markets," said Howard Archer, an economist at Global Insight.
And a recent research report from J.P. Morgan Chase & Co. suggests the recent tightening in the euro interbank lending rate represents at least as much of a drag on the economy as the rise in the value of the euro against the dollar.
The mounting troubles in lending markets prompted the European Central Bank to say Friday that it will pump in extra funds through the turn of the year, if necessary. Tomorrow, the ECB is expected to supply more than the usual amount of short-term loans to euro-area banks during its weekly refinancing operation, following an operation Thursday in which it provided an added €60 billion in three-month loans. The central bank uses the increase or decrease of funding to keep the rates that banks charge one another for short-term loans close to its 4% target.
Investors expect the ECB will keep its key policy rate steady at 4% through 2008 amid rising inflation, even as growth slows. A growing minority of economists suspect the market upheaval, the strong euro and the U.S. slowdown will push the ECB to cut its rate by a quarter percentage point, perhaps as early as March.
The actions by central bankers haven't been limited to Europe. Last week, the Bank of Canada injected $3 billion in short-term loans, signaling that money markets remain strained throughout the developed world. Banks are hoping more liquidity arrives next month in the form of stepped-up repurchase agreements organized by the Federal Reserve and the ECB, according to a person familiar with the situation.
In an unusual sign of stress, banks are offering to pay well above publicly quoted interest rates for short-term loans. In the Euro commercial-paper market, where banks and companies issue IOUs to investors such as money-market funds, some banks are willing to pay as much as 0.2 percentage point more than Libor, according to a person familiar with the market. Still, the market contracted by $41 billion in the first three weeks of November as investors shied away, according to Capital Market Daily.
In recent days, investor anxiety has spread to the market for covered bonds, which had been the last remaining option for many European banks looking to tap capital markets. The market has long been a major source of financing for public-sector banks and mortgage lenders throughout Europe, including troubled United Kingdom mortgage lender Northern Rock PLC. The market emerged from the summer's credit turmoil relatively unscathed because it was seen as ultrasafe: Covered bonds must meet stringent requirements for the quality of loans backing them and must carry further guarantees from issuers.
As banks' other options for financing have dried up, they have increasingly turned to the covered-bond market. In October, there were 73 global covered-bond deals for $36.9 billion, the second-highest monthly volume of the year, according to research firm Dealogic. November volume as of Thursday had reached 47 deals for a total of $23.8 billion. Investors were expecting a further flood of issuance that would have increased yields and lowered prices.
Last week, investor demand cooled as Moody's Investors Service said it planned to review the rating of covered bonds issued by Northern Rock -- a rare event in the more-than-century-old market. As the market grew more volatile, a European bond council suspended price quotations among banks that had served as primary buyers and sellers of covered bonds.
Lack of investor interest has forced a number of banks -- including Allied Irish Banks PLC's AIB Mortgage Bank and Abbey National, a U.K. subsidiary of Spain's Banco Santander SA -- to postpone planned bond issues.
Citing the slackened demand, Barclays Capital said issuance last week totaled just €1 billion and called it an "overnight U-turn in primary covered-bond market sentiment."
Ted Packmohr, senior covered-bond analyst at Dresdner Kleinwort in Frankfurt, said the market's closure could become a serious problem if it lasts into next year, when issuance typically picks up as banks return to the market. Among the hardest hit would be Spanish and U.K. banks, which had relied more heavily than others on the market.
"How big a deal this is actually going to be depends on how long the market will remain shut," said Mr. Packmohr. He and other analysts expect the freeze to last through the end of the year.
--Joellen Perry and Paul Hannon contributed to this article.
Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com and Mark Whitehouse at mark.whitehouse@wsj.com
RELATED ARTICLES AND BLOGS
Related Articles from the Online Journal
• Euro-Zone Banks Hoard Cash, Prompting ECB to Take Steps
• Rescue Readied By Banks Is Bet To Spur Market
• Banks May Pony Up $60 Billion for SIVs
• Two Views on Hung Loans
Blog Posts About This Topic
• byzantine_ruins @ 2007-11-25T14:12:00 byzantine-ruins.livejournal.com
• The Finance Round-Up: November 23rd 2007 canada.theoildrum.com
More related content Powered by Sphere
http://online.wsj.com/article/SB119602868667303311.html?mod=hps_us_whats_news
_______________________________________________________
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