Eurozone banks buy sovereign bonds, reviving ‘doom loop’ fear
Banks across the eurozone have begun to stock up on their own governments’ bonds for the first time since the bloc’s debt crisis half a decade ago — even as the European Central Bank launches a fresh round of stimulus to prod them into lending.
Encouraging big banks to supply credit to companies and households has been a centrepiece of the ECB’s policy efforts in recent years, via successive programmes of cheap loans from the central bank. However, some banks have elected to shore up their balance sheets by buying government bonds — which require no capital to be set against them — rather than generating new loans, which do.
On Thursday, ECB president Mario Draghi acknowledged that banks had used some of the central bank’s previous cheap-loan programmes to finance the purchase of sovereign debt. Mr Draghi was speaking as the ECB took markets by surprise in announcing a fresh series of multiyear loans to banks, in a bid to spur growth.
He said that during economic downturns government bonds could deliver returns that look favourable compared with the risks of lending to the real economy, but tweaks to the design of the ECB’s cheap-loan programmes had resulted in banks passing on more cash to businesses and consumers.
However, the ECB’s own data show that eurozone banks have recently begun to increase their sovereign debt holdings once more: they bought a net €1bn of their domestic government’s debt in the 12 months to January.
The figures are likely to revive fears about the effect that swings in the price of government debt can have on banks’ balance sheets — a dangerous dynamic that became known as the “doom loop” during the eurozone debt crisis.
“Bank ownership of sovereign debt is a bit of a doubled-edged sword,” said Marchel Alexandrovich, senior European economist at Jefferies.
“A strong domestic investor base is helpful in difficult times as it means there’s always someone there to buy, but . . . when banks are sitting on large sovereign debt positions it means that a crisis in the fiscal arena can spill over into the bank arena.”
Bond sales by Eurozone banks
The new scheme announced by the ECB on Thursday will start in September and end in March 2021. Each operation will have a two-year maturity.
Nick Wall, a fund manager at Merian Global Investors, said the lack of demand from European borrowers meant that the ECB was “pushing on a string” by launching the new loans. “This helps at the margins by keeping the cost of credit cheap, but the issue in Europe has been demand for credit,” he said.
In recent years the ECB has pumped €700bn into eurozone banks’ balance sheets via cheap loans.
The last round, dubbed Targeted Longer-Term Refinancing Operations or TLTRO for short, was launched in mid-2016 and its loans are due to mature next year and in 2021, a development which would have left banks searching for an alternative source of funds.
Banks have already stepped up their fundraising in the past year, selling €300bn of bonds in the year to end-February according to figures from data provider Refinitiv. That was the largest amount since March 2015.
Fabio Bassi, European rates strategist at JPMorgan, said that Italian banks in particular were likely to benefit from the ECB’s new lending programme. Some 55 per cent of the last TLTRO went to banks in Italy and Spain, according to JPMorgan figures.
Shares across the European banking sector fell on Thursday, as the ECB pushed back its horizon for raising interest rates, but the details of the new lending programme were a boon for Italian lenders. Falls at UniCredit (-3 per cent) and Intesa Sanpaolo (-2.2 per cent) were less than the average 3.3 per cent.
Estimate uptake to the ECB´S TLTRO-II