STOCK MARKET WATCH -- Friday, 4 May 2012

[Demeter]

14. ECB Loans Plant Seeds of European Disintegration

http://www.businessweek.com/news/2012-05-01/ecb-recyled-loans-plant-seeds-of-european-disintegration

European Central Bank measures to stem the region’s debt crisis threaten instead to undermine the euro. ECB loans worth more than $1.3 trillion have been recycled into government bonds, capping borrowing costs. As Italy’s reliance on its local institutions increases and Spanish banks accelerate purchases of domestic government securities, however, the economic ties that bind the fate of euro members to each other loosen, weakening the incentives for cross-border support to defend the currency union.

“As the local bond markets have become owned only by domestic institutions, there is less and less incentive for the other countries to support and bail out one of those,” said Stephane Monier, who helps manage more than $150 billion as head of fixed income and currencies at Lombard Odier Investment Managers. “Basically you’re planting the seeds for the disintegration of the euro zone.”

FINALLY!

The ECB began two rounds of extraordinary three-year loans at an interest rate of 1 percent in December in its longer-term refinancing operations. Italian banks boosted their government debt holdings to 323.9 billion euros ($428.1 billion), from 301.6 billion euros in February and 247.4 billion euros in November, according to the ECB. Spanish banks own 263.3 billion euros of government securities, up from 245.6 billion euros in February and 177.9 billion euros in November. Since the LTROs, both nations have said they will miss deficit-reduction targets agreed with the European Commission, driving Spain’s two-year yield to 3.36 percent, more than one percentage point above this year’s low. Italian yields have jumped almost 1.5 points since their 2012 low, reaching 3.14 percent, while German yields fell to a record-low 0.075 percent on April 27.

Meanwhile, foreign investors are selling, separate data shows. Non-residents cut their holdings of interest-bearing Spanish government bonds by 20 billion euros, or 9.3 percent, in March, according to a document published on the website of Spain’s economy ministry on April 27.

“Everywhere when you have a crisis, you have a re- domestication of markets,” said Laurent Fransolet, head of fixed-income strategy at Barclays Capital in London. “In Spain and the other peripheral countries, it is clear there has been very large selling by foreign investors and someone needs to pick that up. The uncertainty is making investors more jittery.”