From the online Wall Street Journal at 11pm:
- EU Banks Struggle to Lure Deposits
Several large Italian and Spanish banks recently reported double-digit percentage declines in deposits from corporate and other institutional clients, although their overall deposit levels fell more modestly, as lenders hold a greater share of retail deposits. The deposit base at Spanish banks dropped by €48 billion ($64.8 billion), or 2%, in the third quarter, according to the Bank of Spain.
The deposit outflows come as emergency borrowings by banks from the European Central Bank soared to their highest level in more than two years Tuesday, with the ECB allotting €247.2 billion in seven-day funds to banks, a jump from the previous 2011 high of €230.3 billion.
Meanwhile, banks in countries like Spain, Portugal and Italy are scrambling to retain existing customers and attract new ones by dangling ever-higher interest rates on deposits, making it more expensive for banks to finance themselves affordably.
[...] To be sure, analysts say that overall, European banks still have hundreds of billions of euros of deposits, many of them from individual customers who tend to be reluctant to switch bank accounts. The lenders also can turn to financial lifelines from the European Central Bank, posting government bonds and other assets as collateral.
But if the drought continues, it could pose a threat. European banks face a wave of maturing debt next year—up to €800 billion, by some analyst estimates. If banks can’t replace those funds by selling bonds or gathering new deposits, they will need to compensate by cutting lending. The situation is worrying regulators, policy makers and investors. Some officials have called for European governments to band together to guarantee new long-term bank debt, but senior finance officials from European countries rejected the idea at a meeting last week, according to people familiar with the discussions.
[...] Deposit levels at five of Spain’s top six banks declined in the third quarter, while five of Italy’s largest lenders also reported declines, according to a report by analysts at Citigroup . . . Spain and Italy’s largest banks each reported declines of at least 10% in the quarter that ended Sept. 30.
With deposits simultaneously becoming scarcer and more valuable as a funding source, some banks are entering into a sort of arms race. They are jacking up the interest rates they are offering on deposits and venturing into other European countries in the hunt for new customers. Even though the ECB is keeping its key interest rate at the historically low level of 1.25%, banks in Portugal, Spain and Italy are routinely offering to pay customers more than 4% annually for deposits.
- Europe’s Smart Money Votes With Its Feet
In Italy, nonretail customers withdrew €56 billion in the three months to the end of September, a fall of 12%. Intesa Sanpaolo and UniCredit saw corporate deposits decline by 16% and 10%, respectively, according to Citigroup research. Similarly, in Spain, nonretail deposits fell by 20% in the third quarter, with Santander and BBVA losing 10% and 11%, respectively. Even the French banks weren’t immune: Société Générale and BNP Paribas saw their corporate-deposit balances fall by 7% and 6%, respectively.
[...] if the trend in deposits continues, it will add to the pressure on banks to deleverage. Euro-zone banks are likely to cut up to €2.5 trillion of assets, equivalent to 5% of their total assets, as they struggle to meet new regulatory rules, reckons Morgan Stanley. Much of this can likely be achieved by cutting international operations and investment-banking activities. But as banks try to pass on higher funding costs, lending to core domestic economies could suffer, worsening the debt crisis.
- Santander Raises Cash With Chile Stake Sale
Banco Santander SA is preparing to sell a nearly 8% stake in its Chilean business, the latest in a string of moves in which the Spanish bank is raising concerns among investors.
The move in Chile comes as Santander, widely viewed by many investors and analysts as one of Europe’s strongest lenders, also has unveiled plans to sell 8% of its Brazilian unit; the deals could raise a total of about $3.5 billion. It also sold a slice of its U.S. auto-loan unit last month for about $1 billion and made a recent offer to exchange some of its outstanding bonds, raising about €600 million ($809 million). The goal is to strengthen the Spanish bank’s capital cushions.
The efforts highlight how Santander and other European banks are scrambling to raise capital without taking steps such as reducing dividend payments or selling new shares at distressed prices.
[...] the terms and timing of Santander’s moves are raising eyebrows in the investment community. Analysts have expressed surprise that the bank is selling chunks of two of its prized Latin American businesses. And the bank’s debt-exchange plan, intended to drum up less than €1 billion in fresh capital, is on such unfavorable terms that it prompted a group of British insurance companies that are some of the major holders of this debt to band together to complain.
- Big Selloff Hits Europe Bond Markets
The Spanish Treasury was forced to pay a euro-era record 5.11% yield on three-month Treasury bills at auction, more than double the rate paid at last month’s auction. By way of comparison, to access the short-term debt market Spain now must pay more than Greece paid at its last three-month auction a week ago.
[...] The spike in yields fanned fears that the country will find it unsustainable to raise funds in the market if the trend persists. The result underscored concerns that more financially weakened euro-zone governments may soon be priced out of the capital markets.
The cost of insuring European government debt against default using credit-default swaps shot up to record levels as concerns about the euro-zone debt crisis and U.S. deficit-reduction plans continue to spook market participants and subdue activity in the European primary bond market. Default insurance on French, Belgian and Spanish debt leapt above record closing levels Tuesday as bond yields in the region climbed.
French bond yields also spiked sharply in a sign that the debt crisis was continuing to spread to larger, top-rated countries. A continued rise in French bond yields would put the country’s coveted triple-A rating in peril and risk derailing efforts to contain tensions.
- EU Warns Greece on Bailout
The European Union has warned Greece that unless political leaders give written pledges they will back agreed reforms, an €8 billion ($10.79 billion) loan payment won’t be given and the country will run out of money in about 20 days, Greek and euro-zone officials said Tuesday.
- Pressure on Merkel Amplifies
Ms. Merkel on Tuesday stressed that joint debt issuance isn’t the right response now. “The discussion of euro bonds in the midst of the crisis is inappropriate,” she said.
Germany has never categorically ruled out the joint issuance of bonds by the euro’s 17 national governments, known as euro bonds. But Berlin insists that before euro members collectively raise financing on the open market, they must create rules that force each country to exercise fiscal discipline—or pay a heavy price.
However, many analysts say Ms. Merkel may no longer have the luxury of time to wait for euro-zone economies to heal before working on long-term changes Germany believes are needed to prevent such a crisis from recurring.
[...] Many lawmakers in Ms. Merkel’s ruling center-right coalition are deeply skeptical about joint euro-zone liability for debts, which they fear would reduce pressure for southern European countries to rein in government spending. “The moment we let up the pressure, those countries that have such problems will become complacent,” German Finance Minister Wolfgang Schäuble said Tuesday.
In addition to being a hard sell to Germany’s lawmakers and voters, euro bonds may require amending the country’s constitution, requiring a broad consensus among political parties in the euro zone’s biggest member.