Italian and Spanish banks are running out of cash borrowed through the European Central Bank’s three- year-loan program, diminishing their “firepower” to buy government bonds, according to Royal Bank of Scotland Group Plc.
Banks in Italy have spent the equivalent of 46.4 percent of the funds they received from the longer-term refinancing operations, while Spanish ones have used up 42.3 percent, Harvinder Sian, Biagio Lapolla and Simon Peck, interest-rate strategists in London, wrote in a note to clients on April 30, citing ECB data for the period from December to March.
Assuming the banks intended to use about half of the funds to buy higher-yielding sovereign bonds, Italian lenders would have had 6 billion euros ($7.93 billion) left by the end of March, and Spanish banks would have had 16 billion euros remaining, the analysts wrote.
Had they to assigned 65 percent of the LTRO cash for government debt, they’d have had 31 billion euros and 46 billion euros still to spend, according to the note. Based on the rate of purchases in March, that would have meant another 1.6 months of bond purchases for Spain and less than a month’s worth for Italy, the analysts said.
“Aggressive buying done to date means that the remaining firepower from the LTRO for the European government bond markets is lower,” the analysts wrote. “Domestic bank support is likely to fade even further.”
Spanish bonds were the worst-performing of 26 sovereign- debt markets tracked by Bloomberg and the European Federation of Financial Analysts Societies in April, with losses of 1.8 percent. Italian securities were second worst, dropping 1.3 percent, after gaining 11 percent in the first quarter.
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