Euro banks scramble for ECB funding
BANKS’ use of emergency liquidity from the European Central Bank (ECB) shot to its highest level since February yesterday, defying forecasts that demand for one-week loans from the Bank would be the same as last week.
In a worrying reminder of the reliance Europe’s banks still have on the ECB for their day-to-day funding, Eurozone banks borrowed €189bn versus expectations of €135bn.
The banks’ rush for cash came as Fitch warned that any rollover of Greek sovereign debt would send the country’s banking system into default unless the ECB is bends its rules regarding the collateral it will accept in return for emergency funding.
“The most crucial immediate consideration for Fitch’s bank ratings would be whether a mechanism would remain for ensuring that central bank liquidity continues to be provided to the Greek banks,” the agency said. It estimates that Greek banks hold some €45bn in Athens paper, equal to 160 per cent of their equity.
The ECB has warned policymakers not to precipitate a “credit event” – a default – by imposing losses on private holders of Greek debt. This would make it impossible for the Bank to accept Athens’ paper as collateral, it said, which would freeze Greek banks out of the ECB’s emergency loans programme — a situation that Fitch calls a “worst-case scenario”.
But City A.M. understands that the Bank could instead decide to ignore ratings agencies. A source close to the ECB told City A.M.: “When we accept collateral, we can always say we trust the Greek government and they are implementing a programme regardless of what the ratings agencies are saying.”
However, the source added that if an agency were to downgrade Greece to a default, the ECB’s governing council would investigate the suitability of its bonds as collateral.