Dexia’s midnight liquidity | FT Alphaville

Dexia’s midnight liquidity

Nov 23 (Reuters) – France, Belgium and Luxembourg are discussing how to provide temporary state debt guarantees for failed financial group Dexia… the deal has still to be confirmed, leaving the bank dependent on emergency liquidity assistance of about 30 to 40 billion euros ($40.5 – $54 billion), the [Belgian De Tijd] paper said.

Remember the guarantees would be parcelled out among the three governments, according to a ratio that may, or may not, be up for negotiation. Until then…

… Dexia has used, apparently as of November 2011, some €30-40bn of our old friend, Emergency Liquidity Assistance (ELA).

So, let’s pop over to the National Bank of Belgium’s monthly financial statement for October. This is a bit of the asset side (click chart to enlarge):

There’s about €19.8bn held in ‘other claims’ in October, up from €2.37bn in September (box highlighted in red). Other claims (or ‘other assets’) are where you might find ELA sequestered in eurozone national central bank balance sheets, because the ELA borrowing is often in the form of a repo.

We seem to have Dexia’s use of ELA almost doubling over a month, assuming De Tijd’s figures are right. (They were right about Dexia tapping ELA in the first place.) We won’t know until the NBB’s next monthly financial statement is out. But it is concerning.

Just to jog memories — these are loans from national eurozone central banks to lenders which can no longer find enough, or good enough, collateral to borrow from the ECB itself. Usually the rate on these loans is steep. Now, ELA is the risk of the national central bank doing it (so therefore the risk of that central bank’s sovereign), not the Eurosystem overall.

You’d better be sure the lender in trouble is illiquid then, rather than insolvent overall. The longer ELA goes on (say, over a fortnight?) it’s naturally going to lead to questions about the viability of the lender.

The Belgian central bank presumably knows all of this very well. It extended ELA to Fortis in 2008, alongside the Dutch central bank, totalling about €61bn in loans. There’s a 2009 Dutch experts’ report here (in Dutch!) about the Fortis collapse and the risk of prolonged ELA.

Ultimately, as well as the guarantees saga, this goes back to why Dexia needed ELA in the first place. It couldn’t tap ECB liquidity in sufficient amounts, at the same time as watching unsecured funding in the market shrivel up. It tried to arrange secured funding instead. The bank once said it had €88bn of “eligible central bank securities” in its second-quarter financial results. As it turns out, only €20bn of this wasn’t encumbered or already secured elsewhere. Furthermore, the bank sought even more secured funding as unsecured dried up in summer and autumn of 2011, as a recent interim statement suggests:

Between the end of June and the end of October 2011, the secured funding raised by way of bilateral and triparty repos enabled absorption of some of the shocks. The Group also increased its take of Central Bank liquidity. The Group managed to generate additional reserves through swaps of non-eligible versus eligible assets.

Has this secured funding drive worked?

From the ELA situation and the need for guarantees, seems not.

Related link:
Dexia garantie (encore) – FT Alphaville
Dexia en chute encore – FT Alphaville
Oh dear oh Dexia – FT Alphaville