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The secondary covered bond rally rolls on, grinding spreads tighter and pushing yields to their limit. But foresight and fundamentals have played no part in the lust for peripheral paper. As lucrative as the carry trade has been for banks, when things turn sour investors could find themselves trapped.
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The ECB's long term refinancing operation (LTRO) has worked miracles for the primary market and is arguably the only emergency measure to date to have had the desired effect. But central bankers need to think extremely carefully before serving up more of the same.
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The more LTRO funding banks take, the more their senior creditors become structurally subordinated. Another big shot in the arm at the end of February means senior debt gets pushed further down the capital structure. But party on — the ECB won’t let anyone go bankrupt.
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After Lucy Kellaway’s column about the guff adorning UBS’s internal dining menu caused such a stir, Euroblog hoped last week to uncover similar fatuous nuggets lurking in Citigroup’s client entertainment documentation.
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Egypt’s announcement last week that it plans to issue a $2bn sovereign sukuk was a welcome advertisement that put the country back on the map for investors and underscored the change in its attitude towards Islamic finance. But it should not be hasty. A lot more work needs to be done before Egypt attempts to access this line of funding.
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With the market rally extending into its second month, it’s logical for the market to be questioning whether the EBA’s 9% core capital requirement is still necessary. Recapitalising is a pain for the banks, and raises concerns over the supply to the real economy. But scrapping the target now would create much bigger problems down the line — for the EBA itself and for the banks.
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It’s no secret that optimism is hard-wired into syndicate officials. In fact, it’s practically in the job description. Markets never widen. Rather, investors take profit. And when things are tightening by a basis point or two, the market is On Fire.
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CRD III has given HSH Nordbank’s capital ratios a tough time. Nothing new there, but the effects of resecuritisation rules are perverse, even by EBA standards. The hapless lender has painted itself into a corner but the least the wider market can do is question the EBA’s numbers.
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The European Central Bank’s long term refinancing operation has been put to good use by the European banking sector. But its lack of discrimination raises dependency and, longer term, increases systemic risks.
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Moody's reckons the ECB's long term refinancing operation is credit negative for Europe's banks. It's hard to square this with the relief it is providing the sector, but the agency is right to warn of the dangers of relying on central bank funding.