STOCK MARKET WATCH -- Wednesday, 25 January 2012

[Demeter]

21. Big banks to avoid sovereign debt

http://uk.reuters.com/article/2012/01/24/uk-banks-sp-idUKTRE80N1MP20120124

Europe's biggest banks are unlikely to use the funding made available through the European Central Bank's (ECB) three-year lending facility to buy sovereign bonds because of concern about their volatility, a Standard & Poor's bank analyst said on Tuesday. European banks' widespread use of cheap three-year funding by the ECB has boosted speculation in some quarters that the extra liquidity provided could -- as French President Nicolas Sarkozy has suggested -- be used to buy government bonds. That would help ease a euro zone debt crisis which has seen borrowing costs soar for countries from Portugal to France.

But Scott Bugie, Standard and Poor's global head of banking industry country risk, told Reuters there is no sign of any broad movement of funds gained in the ECB programme into sovereigns. "The top-tier banks don't want to buy government bonds because they don't like the volatility in value," he said on the sidelines of an Economist conference, adding that smaller institutions with "nothing to lose" might be less discriminating. European banks' exposure to the sovereign debt crisis helped spark a sell-off in their shares and added to pressure on profits in 2011.

S&P earlier cut the long-term counterparty credit ratings of France's BPCE, Credit Agricole (CAGR.PA) and Societe Generale (SOGN.PA) to "A" from "A+." Risk-averse larger banks have continued to park much of their spare liquidity with the ECB itself and are hanging on to much of the rest to pay off maturing term debt. "There's lots of it to pay off," said Bugie. He added that the ECB market liquidity programme could slow the pace of large banks' sales of government bonds already in their portfolio. Recent quarters have seen banks like BNP Paribas dump billions of euros of exposure to countries such as Italy. "This may slow down the sales or stop the sales but we don't anticipate an increase in purchases by the larger banks like BNP or ING," he said.

More broadly, Bugie said that while he welcomed the Long Term Refinancing Operation (LTRO) programme, it should not be seen as a panacea to European banks' woes. "When you think about the business model, it's not solving the business model of financial institutions," he said.