Clearing house move adds to Spain's woes
20/06/2012 at 17:00
A move by Europe's biggest clearing house that makes it less attractive for banks to hold Spanish government debt is another blow to the country's credit standing ahead of a bond sale tomorrow but its impact is likely to be cushioned by ECB cash.
LCH.Clearnet said late on Tuesday that it was increasing the cost of using the country's bonds as collateral for funds raised via its repo service. The move follows a surge in yields on worries about Spain's finances that have not been assuaged by a deal with its euro zone peers to bail out the country's ailing banks, which are also major buyers of its debt.
A sharp rise in margins for holding Irish sovereign bonds by LCH.Clearnet in late 2010 came ahead of a full-scale international rescue. But analysts said the move was less significant for Spain than for Ireland two years ago as lenders remain awash with cheap European Central Bank funds.
"This illustrates the learning process that Europe is going through," said Neil Smith, analyst at WestLB. "With each mishap they develop a new instrument aimed at extending liquidity or giving flexibility to lenders. The increase in clearing house margins won't be so much of an issue this time round." The ECB pumped a trillion euros of liquidity into lenders shut out of money markets in two three-year tenders in December and February, with Spanish banks amongst the biggest takers. Clearing houses are used by banks in repurchase transactions where bonds are exchanged for cash, sharing the risk of a potential bond default. An increase in charges to trade Spanish bonds reflects an increased risk that Spain will not meet its obligations in full
LCH.Clearnet said it would raise the initial margin on Spanish debt with maturities of between one month and seven years, and between 10 and 15 years. The largest move was in the 3.25-to-4.75-year sector where the charge rose to 7 percent from 5.4 percent
But "the ECB cash has made the impact of the margin rise less apparent", said one London-based credit strategist
Spain is poised to make a formal request to tap a 100 billion euro dollar 127 billion European credit line to recapitalise banks suffering insurmountable losses from a property crash, compounded by a slump in economic activity
Two independent audits due on Thursday will estimate the sector's funding shortfall. One financial source told Reuters the audits will reveal banks need 60 to 70 billion euros of extra capital. But soaring borrowing costs show the deal for Spain's banks has not restored confidence among investors, many whom still expect the euro zone's fourth largest economy will require a full-scale sovereign bailout
The yield on Spain's 10-year government bond has breached in recent days the 7 percent level broadly seen as unsustainable by economists, and the country paid a euro-era high to sell 12-month paper in an auction on Tuesday
Borrowing costs slipped below 7 percent in Wednesday trade but Spain is expected to pay dearly for medium- to long-term debt at an auction on Thursday