Chillin' out till it needs to be funded
Even as deposits at the ECB grew to EUR 464 bln, the constrained borrowing from the Emergency lending facility by Friday bought the crisis watermark lower . Thursday’s usage of the penal 1.75% borrowings exceeded EUR 17 bln and most were worried about Euro’s survival at those levels. Yesterday’s agreement on fiscal consolidation measures yesterday and one year swaps have tightened further with buoyant equities today from 86 bps for the 1 yr Basis swap
However, emergency borrowing receded since then and Deposits grew to EUR 464 bln on Monday as Corporates continue to show more confidence in ECB than in banks or anywhere else, parking a lot of money at ECB.
Italian banks stayed under the scanner though even as French surreptitiously added most doubtful categories of securities, denied earlier, as eligible collateral securities in the new year. Italian Banks have borrowed EURO 210 bln from the ECB facilities till December as per a FT Monday report Unicredito’s failed rights were fully subscribed but the Italian bank has lost 40% of its market capitalisation in the three days since.
Italy’s plans to raise EUR 440 bln in 2012 raised less than a few eyebrows but Fitch pronounced the nation most at risk, in the midst of earlier discussions on a Euro collapse. Italy is one of six nations on Fitch’s Ratings watch even as ECB drained excess liquidity by buyin g back EUR 213 bln in a seven day liquidity absorbing operation for its purchase of sovereign bonds.
Meanwhile, discussions of the 50% haircut and the brinksmanship on Greece, still brought the irish to the door of a second bailout as they reviewed forecast growth downward by 1% from the budgeted 2.5%, with Citi economist Buiter pointing out the mouthwatering 3% rate from the EFSF for its $30 bln Anglo Irish 6% Pro notes that could be refinanced Greece goes off the air unless it gets to rollo ver a EUR 14.4 bln liability by March 20. Italy repayments are due in February
A new item on the crisis agenda that is not so academic as real politik, is ECB’s refusal to participate in the Greek restructuring itself in the EURO 40 bln Greek bonds it holds, thus staying with Greek law as per the current covenants whereas new bondholders get English law protection on the reduced amount ( 50% haircut) The Greek, not happy with ECB participation and stymied by the restructuring process hanging fire are also intrducing “retrofit CACs” or Collective Action Clauses that allow them to force ECB in later years to adopt restructuring on these bonds. CACs are Collective Action clauses that will allow the government to change covenant clauses if majority investors agree. While sovereigns changing clauses would still be coercion, here that would not apply till such CACs are activated allowing investors argument for cause.posted during the first 2012 Merkozy summit games