December 12, 2011
FEARS are growing that the eurozone banking system is on the verge of collapse as lenders struggle to obtain funding, heightening concerns that the latest rescue plan struck by European leaders lacks the bold moves needed to end the region's debt crisis.
The European Central Bank has held meetings about providing emergency funding to Europe's struggling banks as the stresses in the system overshadow a fiscal agreement achieved in Brussels at the weekend.
Although global sharemarkets took some reassurance from the new budgetary rules -- which British Prime Minister David Cameron refused to agree to -- bankers made it clear there was a risk of "collateral crunch" and possible bank failures.
The US sharemarket showed only tepid optimism, rising by 1.55 per cent on Friday on a mix of stronger US local news and reassurance that the new rules should stop eurozone debt ballooning further.
Futures markets were pointing to a 73-point jump on the Australian market today, recovering Friday's losses.
But the picture for European banks remains particularly bleak, with their funding cost in US dollars rising on Friday to 1.22 percentage points below the euro interbank offered rate.
Bank deposits with the ECB now stand at their highest level since June last year as lenders move deposits from their peers to the central bank.
"If anyone thinks things are getting better, they simply don't understand how severe the problems are," a London executive at a global bank said. "A major bank could fail within weeks."
Others said many continental banks, including French, Italian and Spanish lenders, were close to running out of the acceptable forms of collateral, such as US Treasury bonds, that could be used to finance short-term loans.
Some have been forced to lend out their gold reserves to maintain access to US dollar funding.
Bank of America Merrill Lynch chief economist Saul Eslake said the problems at European banks would have a ripple effect in Australia that could not only put pressure on mortgage rates but push up the cost of borrowing for firms using the syndicated loan market. "It's well known that the cost of offshore wholesale funding for Australian banks has gone up, but there's another element that hasn't yet played out," he said.
European banks had the choice of either raising new capital or reducing their loan books, or so-called risk-weighted assets, to satisfy regulators and conform to Basel III capital requirements.
"It appears they're doing the latter, and the least politically painful thing for them to do is to reduce overseas exposures," Mr Eslake said. "In Australia they have been active in the syndicated loan market and in previous years they've rolled loans over as they mature, but they may choose now to drop out."
While local banks were well capitalised and looking to grow credit by making new loans, he warned there was a risk that borrowers would be hit by steeper loan conditions.
"The Australian banks may be willing to step in, but at a price," he said, indicating that terms would probably be renegotiated upwards on loan maturity.
Most of the measures agreed in Brussels to limit fiscal looseness were "a case of shutting the stable door after the horse has bolted", he said.
The banking concerns come after ratings agency Standard & Poor's placed 15 of the 17 members of the eurozone single currency union on negative watch.
Experts have warned that France could lose its AAA credit rating this week, which would create new funding issues for banks using French government bonds as collateral.
Article by Andrew Main From:The Australian