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Monday, March 5, 2012

European Update: Mar 5

Banks Borrow €530 billion from ECB Facility

The ECB lent out €529.5 billion in cheap, three-year loans to more than 800 European banks last week through its Longer Term Refinancing Operations(LTRO). The ECB has now injected more than €1 trillion into the European banking system, enough to fully fund all maturing bank debt through 2013.

The large uptake means bank funding costs are now detached from their respective sovereigns. The uptake is also seen as a positive for bank revenues, although this may not reach the bottom line, as banks use the revenues to clean up books.

The first LTRO was successful in lowering the borrowing costs for sovereigns, as well, with banks buying the much higher yielding sovereign debt. ECB figures show that Italian and Spanish banks increased their sovereign debt holdings by 13 and 29 percent respectively from December.

Following the LTRO, bank deposits with the ECB continued to surge, reaching €821 billion over the weekend, after surging to €777 billion on Thursday. Banks are currently paying the 75 basis on the fund, as the ECB’s overnight facility pays 25 basis points on deposits.

See the ECB's release.

No CDS Trigger for Greek Debt

Greece’s planned debt swap will not trigger the outstanding $3.3 billion in credit default swaps according to the International Swaps Derivatives Association (ISDA). The ISDA has determined that the restructuring of €206 billion in Greek bonds necessitating investors to take a 53.5 % haircut does not constitute a “credit event.” Despite the decision, the ISDA can still declare a credit event and trigger CDS payouts.

Yesterday’s decision was in response to two complaints brought to the ISDA. The first complaint was in regards to the ECB being given de facto seniority in the swap. The second was in relation to the collective action clause that forces hesitant bondholders to take part in the swap.

See the ISDA statement.

IMF Sees Europe as Key Risk to Global Economy

In a report to the G20, the IMF noted that “risks to global growth remain squarely to the downside.” The “overarching risk” is a global reduction in demand from households, firms, and governments. This risk is “further exacerbated by fragile financial systems, high public deficits and debt, and already-low interest rates.”

The IMF notes that policies are needed to shift Europe to a “good equilibrium” and “break the adverse feedback loops between real, fiscal, and financial sectors.”

See the IMF report.

G20 Pressures Germany to Boost Rescue Fund

Finance ministers from the G20 have put pressure on Germany to boost the size of Europe's bailout fund, calling the move "essential" in their decision to contribute funds to the IMF. Germany has opposed boosting the size of the upcoming European Stability Mechanism (ESM) past its planned €500 billion. Some eurozone officials have called for the fund to be boosted to €750 billion or even €1 trillion. Other nations have offered to contribute additional funds to the IMF but have stressed that "the IMF cannot substitute for the absence of a stronger European firewall." –Geithner

Greece Launched Debt Exchange Offer

On Friday Greece made a formal offer to bondholders to exchange €206 billion of government debt for a 53.5% haircut in face value. The cuts amount to a nearly 75% loss in NPV for investors. According to the deal, investors will receive two-year, AAA bonds issued by the European Financial Stability Facility (EFSF. The remaining 31.5 % of face value will be issued as Greek government bonds, maturing in 2023. The new bonds will pay a coupon of 2 % for the next three years, then 3 % for the following five years, and 4.3 % for the remaining maturity.

See the formal offer.

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