Looking at the share price response to the co-ordinated intervention in bank funding markets on Thursday, you might think the eurozone was saved. Shares in BNP Paribas leapt more than 20 per cent, while Crédit Agricole, Société Générale, UniCredit, Intesa Sanpaolo all jumped 10 per cent.
The announcement that the ECB and other central banks were collaborating to provide European banks with a three-month dollar-swap facility – a day after words of reassurance about France and Germany’s determination to keep the eurozone in one piece – turned sentiment positive for a change.
But as the afternoon wore on that exuberance faded – reflecting a truer picture of the importance this measure will have on the European banking system. Analysts agreed: Yes, it is helpful, in particular easing the severe strains put on French banks’ substantial asset exposure in US dollars; but no, it does not fix anything more profoundly.
“The symbolism is that there are central banks that are going to do what it takes, so that is useful,” said one senior bank analyst. “But this is just patching things up. It’s keeping things going. That’s all.”
Eurozone banks, most recently French banks, have found it increasingly difficult to fund themselves with short-term dollar liquidity in recent weeks.
As bond spreads widened and share prices plunged, both BNP Paribas and Société Générale acted to mitigate the tight funding with pledges to sell down tens of billions of euros of US assets. The intervention, co-ordinated with the US Federal Reserve, the Swiss National Bank, the Bank of Japan and the Bank of England, should help ease that short-term funding.
But the more fundamental issue of long-term funding availability remains. There has been next to no issuance of unsecured bonds by European banks since June.
Barclays Capital on Thursday highlighted the €800bn that matures in 2012. Unless markets reopen, banks would be faced with the swift and dramatic reduction in the assets that their balance sheets could support – implying a dramatic squeeze on the supply of credit.
The issue is not a significant problem in 2011 because most banks, conscious that markets might close in the second half of this year, completed the bulk of their long-term issuance by the summer.
Analysts and regulators, such as the European Banking Authority, believe only a radical policy shift, such as a pledge by an enlarged European Financial Stability Facility to guarantee bank debt, could settle markets fundamentally. But others, including the IMF, have suggested EFSF capital injections would be a surer-fire way of convincing markets that banks would be robust enough to withstand eurozone sovereign defaults or restructurings.
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