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Moody’s Downgrades Three French Banks

December 9, 2011 by Leave a Comment

Moody’s cut its ratings on the long-term debt of BNP and Credit Agicole by one notch to Aa3, concluding reviews that began in June and were continued in September. Societe Generale’s long-term debt was cut by one notch to A1.

The downgrades were driven by the increasing difficulties the banks were having in raising funding and the worsening economic outlook, Moody’s said.

Late on Thursday Europe’s banking watchdog, the European Banking Authority (EBA), said the region’s banks must find 114.7 billion euros of extra capital, more than predicted two months ago, to make them strong enough to withstand the euro zone debt crisis and restore investor confidence.

But Moody’s said its ratings did take into account the fact that all three French banks were likely to benefit from state support if the crisis deepened.

“Liquidity and funding conditions have deteriorated significantly for ,” said Moody’s, adding that the banks have historically relied on wholesale funding markets.

“The probability that the will face further funding pressures has risen in line with the worsening European debt crisis.”

All three of the banks have undertaken programmes to sell assets to reduce their reliance on outside funding, but Moody’s said that since many European banks were doing the same thing such asset sales might not generate as much money as the banks hoped.

On Thursday, France’s Autorite de Controle Prudentiel (ACP) regulator said the France’s biggest banks needed to find 7.3 billion euros (6.2 billion pounds) in fresh capital by mid-2012, lower than a previous estimate of 8.8 billion euros.

The Moody’s downgrade comes shortly after Standard Poor’s placed its ratings on BNP, Credit Agricole, and Societe Generale on “credit watch with negative implications” on December 7.

SP had earlier put a series of European states, including France, on watch negative over fears that political leaders were not moving decisively enough to curb the deepening sovereign debt crisis.

The three French banks could not immediately be reached for comment.

(Reporting by Leila Abboud, James Regan; Editing by David Cowell and Mike Nesbit)

Article source: http://www.nytimes.com/reuters/2011/12/09/business/business-us-france-banks-moodys.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Economix Blog: Why Do Foreign Banks Need Dollars?

December 1, 2011 by Leave a Comment

Karen Bleier/Agence France-Presse — Getty Images

The announcement Wednesday that the Federal Reserve, working with other central banks, will offer dollars to foreign banks at cut-rate prices surely raises the question: Why do foreign banks need dollars?

The simple answer is that foreign banks really like the things that dollars can buy. They liked investing in American government debt, and lending money to American corporations, and most of all they liked buying American mortgages and all manner of crazy investments derived from those mortgages.

Bank holdings of assets denominated in foreign currencies ballooned from $11 trillion in 2000 to $31 trillion by mid-2007, according to a 2009 report by the Bank for International Settlements. European banks posted the fastest growth, and that growth was concentrated in dollar-denominated assets. By the eve of the crisis, the dollar exposure of European banks exceeded $8 trillion.

Many of these investments were funded on a short-term basis. The paper from the Bank for International Settlements estimates that European banks had a constant need for $1.1 trillion to $1.3 trillion in short-term funding. The banks raised that money mostly by borrowing domestically and then acquiring dollars through foreign-currency swaps. Banks also sold short-term debt to American money-market funds.

The financial crisis happened in large part because investors stopped providing banks with short-term funds. They lost confidence in their ability to discern which banks could repay such loans.

In response, the Fed started offering dollar loans to foreign banks in December 2007. At the peak of the lending program, in December 2008, foreign banks held more than $580 billion provided by the Fed. The European Central Bank accounted for half the peak total, $291 billion. Loans to the Bank of Japan peaked at $123 billion, but most of the rest of the dollars also went to Europe, to the Bank of England, the Swiss National Bank and the central banks of Sweden, Norway and Denmark.

An analysis by the Federal Reserve Bank of New York, published earlier this year, found that the dollar loans played an important role in stabilizing foreign banks during the financial crisis. (Those banks also borrowed directly from the Fed, in large quantities, through American subsidiaries.)

Forward to the present moment: European banks have tried to reduce their dollar exposure since 2008 by shedding dollar-denominated investments and avoiding new ones. The Bank for International Settlements said in a 2010 paper that the short-term dollar needs of European banks might have declined to as little as $800 billion by the end of 2009. It is likely that banks have made some additional progress over the last two years. But the funding need remains considerable, and once again private investors like money-market mutual funds are pulling back from lending.

And once again the Fed is stepping in, although so far it has lent only $2.4 billion.

Article source: http://feeds.nytimes.com/click.phdo?i=447ced4469ec7997e24a3d7961cabeeb

Filed Under: Economy News Tagged With: , ,

In Europe, Anxious Market Shifts Focus To Italy

November 7, 2011 by Leave a Comment

Among fresh warning signs, Italy’s cost of borrowing has jumped to the highest rate since the country adopted the euro. Others signs include pressures building in the plumbing of Europe’s banking system. While those pressures are not yet at the levels experienced during the 2008 financial crisis, when some markets in the United States froze altogether, they are high enough to cause worry, analysts say.

Even as Greece reached an agreement on Sunday to form a coalition government meant to avert the collapse of the latest bailout plan for the euro zone, investors are still demanding greater certainty on how Europe would pay for a rescue package aimed at stopping the Greek financial contagion from spreading to Italy or Spain.

“This is a bit of a sideshow,” Mark D. Luschini, chief strategist at Janney Montgomery Scott, said of the shifting political leadership in Greece. “Markets will react favorably to this, but they won’t rally hard on the news. Italy is the bigger issue.”

In the United States, credit markets tightened earlier this year during a political stand-off over the debt ceiling and the ratings downgrade of the country’s long-term debt by Standard Poor’s, but conditions have eased since then.

European banks are likely to remain wary about lending to one another, analysts predict, and investors will continue to require high interest rates on the billions of euros in loans Italy needs each month to keep its economy afloat.

The yield on 10-year Italian notes has surpassed that on Spanish debt, reaching 6.35 percent on Friday after leaders at a meeting of the Group of 20 nations failed to come up with details on how to stop the European crisis from spreading. The rising yield is troubling because once the interest rates on the debt of the bailed out countries Greece and Portugal surpassed 7 percent they shot up far higher, requiring those countries to turn to outside sources of financing. Rates on their debt remain in double digits.

At the end of last month, Italy issued 3 billion euros worth of bonds at an interest rate of more than 6 percent, about 1.5 percentage points higher than it had had to pay as recently as the summer. The extra bond yields are adding as much as 3 billion euros (about $4.1 billion ) annually in additional interest payments, estimates Tobias Blattner, a former economist at the European Central Bank who is an economist at Daiwa Securities in London.

Analysts are concerned that if interest rates on Italian debt keep rising, the country may no longer be able to afford to borrow on the open markets and instead would have to turn to official lenders like the European Union or the International Monetary Fund.

The latest rate “is a warning,” said Mark McCormick, currency strategist at Brown Brothers Harriman. “Seven percent would be a point of no return.”

The European Central Bank is providing another gauge of European stress — the amount of sovereign bonds it is now buying on an almost daily basis. The central bank is trying to provide a market for the debt of countries like Italy and keep interest rates from rising to punishing levels.

This year, the amount of sovereign debt held by the central bank has more than doubled, to over 150 billion euros. Many analysts say they think the bank would have to buy bonds on a much larger scale to stop interest rates from creeping higher, let alone drive yields substantially lower.

 European banks, worried about each others’ exposure to bad debts, have demanded an increasingly higher interest rate to lend euros to one another. The rate, measured by a gauge called Euribor-OIS, was 20 basis points as recently as June, but has since jumped to 90 to 100 basis points. (A basis point is one-hundredth of a percentage point.) The current rate, however, is still far below levels in 2008 and 2009 during the financial crisis, when it reached more than 2 percent.

 Since May, sources of dollars have also been drying up, as United States money market funds have pulled back from buying the short-term debt of European banks.

Article source: http://feeds.nytimes.com/click.phdo?i=da66e82fc3fb58398d79bed085250fad

Filed Under: Business News Tagged With: , ,

Borrowing Costs Rise for Spain and Portugal

April 20, 2011 by Leave a Comment

MADRID — Spain and Portugal managed on Wednesday to raise the targeted amounts in their latest debt auctions, an important test of market confidence amid Lisbon’s negotiations for a financial bailout and Madrid’s attempts to avoid needing one.

Spain sold €3.37 billion, or $4.9 billion of debt, with the average yield on the benchmark 10-year rising to 5.47 percent from 5.16 percent last month. The auction met with strong demand and was at the top end of its target. That was an improvement on a treasury bill auction on Monday, when Spain barely managed to meet its minimum target despite offering higher rates to investors.

Portugal also had to offer higher rates in the sale of €1 billion of short-term treasury bills, but met its target and drew strong demand. Analysts suggesting that the result will encourage the Portuguese treasury to sell more short-term debt while its bailout talks continue.

The bond auctions came amid worries that the financing difficulties of ailing euro economies are far from resolved — even those of already-rescued countries like Greece.

Athens received a €110 billion bailout last year but may still be forced to restructure its debt because of the unsustainable cost of repaying investors at double-digit interest rates.

Meanwhile, strong gains in last weekend’s elections in Finland by nationalist politicians, who are skeptical about having to bail out fellow euro members, have raised concerns about completing the €80 billion rescue package requested by Portugal.

“The costs of funding are up sizably as a result of the spill over effects from Greek restructuring talks, and this might re-ignite contagion fears,” said Chiara Cremonesi, fixed-income strategist at UniCredit, in a note to investors regarding Spain. “The good news is that demand was healthy, and this will reassure investors.”

In the Portuguese auction, yields for the six-month bills rose to 5.53 percent from 5.12 percent at the last auction on April 6.

Market sentiment has seesawed in the past months amid diverging signals from European politicians about their willingness to provide further financing to countries that have already requested a rescue and prepare for possible additional bailouts. In particular, any bailout of the Spanish economy, which is bigger than that of Greece, Ireland and Portugal combined, could put the survival of the euro in question.

At its last auction of 10-year bonds, for instance, the Spanish treasury managed to lower slightly its borrowing costs following a mid-March agreement by European leaders to strengthen the European Financial Stability Facility available to rescue troubled economies, as well as allow the facility to purchase government debt in some conditions.

Since then, however, the European political landscape has become more fragmented because of the fall of the Portuguese government and the Finnish election result.

Officials from the International Monetary Fund, the European Commission and the European Central Bank arrived in Lisbon last week to start negotiating the terms of a bailout. Their goal is to complete a deal by mid-May, ahead of a June 2 general election there. June is also the month when Portugal faces its toughest refinancing hurdles of the year.

Article source: http://www.nytimes.com/2011/04/21/business/global/21euro.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,