European Central Bank president Mario Draghi has made it clear in several speeches that the bank is ready to do whatever it takes to ensure the single currency’s survival, including purchasing unlimited amounts of peripheral European sovereign debt. But the ECB’s imminent inundation could undermine these efforts, warned Spoody’s.
“Sentiment on peripheral jurisdictions has become increasingly buoyant, but the actual European Central Bank building and all of its staff are not,” said Christian Alders, a Spoody’s credit analyst based on high ground in the hills above Frankfurt.
Lacking ECB support, banks in Italy and Spain will have to rely on the capital markets and retail deposits for future funding. But the catastrophe could close both these avenues to borrowers. Death and destruction across mainland Europe will slow deposit growth in most jurisdictions. And as non-perishable foodstuffs and medical supplies will likely supplant the euro as currency in most regions, there will be steep haircuts on bank capital, said Spoody’s.
Issuers turning to the capital markets will fare little better. Senior spreads were already prohibitive for many borrowers before the tsunami’s approach and will move wider in the aftermath, said bank analysts.
“Surviving investors will be hungry, desperately, desperately hungry, but their appetite for unsecured risk will be minimal,” said Mats Magnusson, head of FIG research at a London investment boutique. Secured funding is a better option, but nature’s fury will leave little in the way of collateral.
“Ship and aircraft Pfandbriefe will probably become more popular, but issuers might find better use for the assets than as covered bond collateral,” he said.
The fallout is not confined to the primary market. Secondary illiquidity is already a problem and 100 billion cubic tonnes of sea water is unlikely to improve matters.
“Oh, there will be lots of fresh liquidity, lots and lots and lots,” said Francine Meyers, a fixed income analyst in London. “Just not the kind of liquidity we want.”
However, some borrowers will be better placed to weather the crisis than others. Those well inland and above sea level and mentally prepared to do anything and everything to survive had the best chance, she added. And though rating agencies were uniformly negative on the credit outlook, some analysts stressed that there was significant room for error in any prediction.
“None of our rating matrices are able to factor in the end of civilisation as we know it,” said Alders. “Not even the structured finance one.”