Europe Banks Resist Draghi Bid to Avoid Crunch by Hoarding Cash

January 11, 2012, 1:55 AM EST By Anne-Sylvaine Chassany and Gabi Thesing

Jan. 11 (Bloomberg) -- Banks are hoarding the European Central Bank’s record 489 billion-euro ($625 billion) injection into the banking system, thwarting attempts by policy makers to avert a credit crunch in the region.

Almost all of the money loaned to 523 euro-area lenders last month wound up back on deposit at the Frankfurt-based central bank instead of pouring into the financial system, according to estimates by Barclays Capital based on ECB data. Banks will use most of the money from the three-year loans to meet their refinancing needs for this year and next, analysts at Morgan Stanley and Royal Bank of Scotland Group Plc estimate.

“It’s illusory to think that the measure will translate into credit generation,” Philippe Waechter, chief economist at Natixis Asset Management in Paris, said in an interview. “It will assuage some of the anxiety banks have regarding their liquidity needs. But they’ve engaged into a massive overhaul of their strategy and shrinkage of their balance sheets, which is, coupled with the deteriorating economy, not compatible with increasing credit.”

Governments are urging European banks to keep lending to companies and individuals while requiring them to raise an additional 114.7 billion euros of core capital by June to weather a deepening sovereign-debt crisis. Instead of raising equity, most lenders across Europe have vowed to meet capital rules by trimming at least 950 billion euros from their balance sheets over the next two years, either by selling assets or not renewing credit lines, according to data compiled by Bloomberg.

That has stirred concern among policy makers that banks will cut lending and throttle growth in the euro region.

ECB Deposits

Banks have been parking almost all extra liquidity from the ECB loans back at the central bank. Barclays Capital estimates firms used 296 billion euros of the Dec. 21 three-year loans to replace maturing shorter-term ECB borrowings. That left only 193 billion euros of additional money for the financial system. Overnight deposits with the ECB have climbed by 219 billion euros since the loans to a record 482 billion euros, suggesting the central bank funds haven’t so far reached customers.

Banks account for about 80 percent of lending to the euro area, making them “crucial to the supply of credit,” according to recently installed ECB President Mario Draghi. By contrast, U.S. companies rely more on capital markets for financing, selling bonds to investors.

The ECB lending, and a follow-up loan offering on Feb. 28, won’t ease the pressure on banks to shrink, say analysts including Huw van Steenis at Morgan Stanley in London.

“The ECB loans will largely be used to pre-fund 2012 and some of 2013’s bank refinancing needs, but it will not stimulate lending,” Van Steenis said. They will “just stop it falling off precipitously.”

Refinancing Needs

Euro-area banks have more than 600 billion euros of debt maturing this year, the Bank of England said in its financial stability report last month. The first ECB loan offering should help cover about two-thirds of that amount, Goldman Sachs Group Inc. analysts say. Morgan Stanley’s Van Steenis estimates banks may reduce assets by as much as 2.5 trillion euros in two years, a process known as deleveraging.

The volume of loans to households and companies in the 17- nation euro area shrank in November for the second consecutive month, the ECB said on Dec. 29. Loans were still up 1.7 percent over the year-earlier period, slowing from a 2.7 percent increase in the 12 months through October.

When granted, loans are getting costlier for borrowers. Since July, interest margins have increased, with investment- grade borrowers in Europe paying an average of 91.6 basis points more than benchmark rates, up from 84.4 basis points during the first half of 2011, according to data compiled by Bloomberg. A basis point is one-hundredth of a percentage point.

Merkel, Sarkozy

“We must avoid a credit crunch for our economies,” European Union President Herman Van Rompuy said on Jan. 9. “The recent measures by the European Central Bank on a long-term lending facility for the banks are welcome in this context.”

The European Banking Authority, which oversees the region’s regulators, asked banks on Dec. 8 to retain earnings, curb bonuses and raise equity to boost core capital before resorting to cuts in lending.

The EBA followed both French President Nicolas Sarkozy and German Chancellor Angela Merkel in urging banks to keep lending. Sarkozy said on Oct. 27 that he had asked firms to shift “almost all” of their dividends into strengthening balance sheets and to make bonus practices “normal.” Merkel said on Oct. 9 she was “determined to do whatever necessary to recapitalize the banks to ensure credit to the economy.”

‘No Credit Crunch’

Bankers have said they haven’t restricted lending and that demand for credit is slowing as growth slows.

“All banks I talk to keep lending to small- and medium- size enterprises and households,” Christian Clausen, president of the European Banking Federation, an industry association, said on Dec. 9. “That part of the bank will keep rolling.”

There is “no credit crunch,” Frederic Oudea, chief executive officer of Societe Generale SA, France’s second- biggest lender, and chairman of the French Banking Federation, said last month. “The reality is that credit is available,” he said in an interview on BFM radio on Dec. 16.

Even so, companies across Europe say credit is tightening.

In France, where credit to the private sector increased by 3.7 percent in November compared with a year earlier, the majority of the country’s company treasurers said they encountered “very strong tensions” in negotiating bank loans, with more than 50 percent of respondents saying the process led to more expensive terms, according to a December survey by the French Association of Corporate Treasurers.

‘Double Punch’

The majority of those polled said obtaining bank financing was “as difficult as at the end of 2008,” after Lehman Brothers Holdings Inc. collapsed.

U.K. banks expect to toughen their criteria on loans to companies and households in the first quarter because of strains in the wholesale funding market, the Bank of England said Jan. 5in its fourth-quarter Credit Conditions Survey.

Belgian credit growth slowed to 3.1 percent in the 12 months to the end of October, from 3.6 percent at the end of September, the country’s central bank said on Dec. 12.

With the ECB’s injection, “deleveraging may happen in a more orderly way, but it doesn’t mean it will be painless,” said Alberto Gallo, head of European credit strategy at RBS. Banks are faced with high long-term financing costs, a deteriorating economy and difficulties raising capital, he said. “It’s what I call the double punch: A combination of negative growth and banks’ deleveraging will affect lending activity.”

Draghi’s Priority

Even the ECB’s Draghi, who has made it one of his priorities is to keep credit flowing into the economy, said the central bank’s loan offerings may fail to achieve that goal.

“Monetary policy cannot do everything, but we’re trying to do our best to avoid a credit crunch that might come from a lack of funding,” Draghi said Dec. 19 at the European Parliament in Brussels. “We have to be extremely careful here, because there may be other reasons that create a credit crunch.”

Draghi may be wary of the U.S. experience with multiple rounds of bond purchases. That so-called quantitative easing hasn’t stimulated lending, Natixis’s Waechter said.

“Lending really picked up when the economy got better,” he said.

The ECB cut its forecast for euro-area economic growth in 2012 to 0.3 percent on Dec. 8 from a September prediction of 1.3 percent. The central bank expects the economy to expand 1.3 percent next year.

‘Kick the Can’

In the U.S., almost all categories of bank lending fell in 2009 and 2010 and didn’t start improving until last year, when the Federal Reserve stopped its second wave of quantitative easing, according to data by the U.S. institution. Banks increased their holdings of Treasury and agency securities in 2009 and 2010, showing they were using the Fed’s cheap money to own safe government paper.

Because quantitative easing tends to improve capital markets first, the healing will be even slower in Europe given its reliance on banks for borrowing, according to Gallo.

“The ECB loans are a kick-the-can measure that doesn’t fix the banks’ structural problems,” Gallo said. “Deleveraging needs to happen.”

--With assistance from Christine Harper in New York, Patricia Kuo in London and John Martens in Brussels. Editors: Keith Campbell, Edward Evans, Robert Friedman.

To contact the reporters on this story: Anne-Sylvaine Chassany in London at achassany@bloomberg.net; Gabi Thesing in London at gthesing@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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Draghi Says He’s Certain Italian Banks Will Pass Stress Tests

July 08, 2011, 9:02 AM EDT By Jeffrey Donovan

July 8 (Bloomberg) -- Bank of Italy Governor Mario Draghi said he’s certain that the country’s lenders will pass European stress tests.

“I’m certain, based on our analyses, that the Italian intermediaries will pass with a signficant margin, the stress tests that are currently being undertaken in Europe, confirming their adequate level of capitalization,” he said in an e- emailed statement today.

He added that new Italian austerity measures make balancing the country’s budget in 2014 a “realistic” goal.

To contact the editor responsible for this story: Jeffrey Donovan at jdonovan26@bloomberg.net

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Merkel Says ‘Could Back’ Draghi as Trichet’s Successor at ECB

May 11, 2011, 7:00 AM EDT By Rainer Buergin

(Updates with euro in fifth paragraph.)

May 11 (Bloomberg) -- German Chancellor Angela Merkel signaled her backing for Mario Draghi as the next president of the European Central Bank, leaving the Bank of Italy governor unopposed by Europe’s political leaders.

“I know Mario Draghi,” Merkel told Die Zeit newspaper in an interview published today. “He’s a very interesting and experienced person. He’s very close to our ideas of the stability culture and solid economic policy. Germany could support his candidacy for the office of the ECB president.”

Merkel’s remarks, her first to mention a candidate for the ECB post by name, were confirmed by the Chancellery and by her chief spokesman, Steffen Seibert.

Germany is the last of the four biggest euro-region countries to endorse Draghi after French President Nicolas Sarkozy told Italian Prime Minister Silvio Berlusconi on April 26 that he would back an Italian. Spanish Finance Minister Elena Salgado called Draghi an “excellent candidate” the next day.

The euro failed to react as the news broke today. It was up 0.25 percent to $1.4392 as of 12:26 p.m. in Berlin.

Euro area finance ministers tentatively plan to make the ECB nomination when they meet in Brussels on May 16. Germany has previously signaled that European leaders will make a decision on an ECB candidate at a June summit.

Weber Pulls Out

Draghi became the frontrunner in February when Germany’s contender, then-Bundesbank President Axel Weber, pulled out of the race to succeed Jean-Claude Trichet at the ECB. Jens Weidmann, formerly Merkel’s chief economic adviser, took over at the helm of the Bundesbank this month.

Draghi’s candidacy is a done deal in Merkel’s coalition, a government official said in Berlin on condition of anonymity because of the sensitivity of the matter. The government’s main concern is having a candidate in place who will represent German interests and Draghi fits the bill, the official said.

The eight-year term of the ECB’s current president ends in October, creating an opening at the top of the world’s second- most powerful central bank after the U.S. Federal Reserve. While Germany alone cannot dictate who wins the post, its status as Europe’s largest economy and biggest guarantor of aid to peripheral euro countries make it the dominant voice in the appointment.

Debt Crisis

Draghi will inherit an ECB very different to the one that Trichet took over in November 2003. As ECB president, Draghi will have to eventually steer the central bank out of a sovereign debt crisis that that forced it to take the unprecedented steps of buying government bonds, a move some council members said jeopardizes its independence.

The ECB is also trying to convince politicians that Greece can’t be allowed to restructure their debts, a move that Executive Board member Lorenzo Bini Smaghi says could see part of the Greek banking system collapse.

At the same time, Draghi will also have to convince investors and voters that he can fulfill the ECB’s primary mandate and get inflation under control. Germany’s biggest- selling Bild newspaper earlier this year raised questions about whether an Italian could be trusted to get a grip on prices given the country’s inflationary history. The newspaper last month backed Draghi’s campaign, saying that Merkel wanted to support “the most German of the remaining candidates.”

Inflation accelerated to 2.7 percent in April, the fastest pace in 2 1/2 years and the ECB raised interest rates in that month for the first time in three years.

MIT-Trained

Draghi, a Massachusetts Institute of Technology-trained economist, has worked at the World Bank and Goldman Sachs Group Inc. He is also chairman of the Financial Stability Board, which was established by the Group of 20 nations in 2009 to oversee development of standards to strengthen global regulation.

In a sign Draghi understood the need to meet German skepticism head on, he appealed to the German inflation-fighting mindset, saying on April 13 that monetary policy is still “accommodative” even after the ECB raised its benchmark rate on April 7.

In February, he told newspaper Frankfurter Allgemeine Zeitung that Germany is an example for other nations, calling for tougher sanctions for budget-rule breaches and vowing to ensure price stability.

--With assistance from Brian Parkin, Tony Czuczka and Patrick Donahue in Berlin and John Fraher in London. Editors: Alan Crawford, Leon Mangasarian

To contact the reporter on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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