Credit Agricole has.
And as the French bank notes, eurozone banks have been rather big buyers of eurozone government debt in recent years — currently owning 26 per cent of Europe’s sovereign bonds.
It’s worth asking then, as Credit Agricole does, whether they’ll keep buying amid Club Med concerns, and as the European Central Bank slowly withdraws some of the funds which previously allowed the banks to go on a carry-trade spree — using cheap ECB liquidity to snap up higher-yielding bonds.
Says the bank’s fixed income team:
This question has become more important given the quite low take up from the ECB’s two most recent operations, the 3 month and the 6 day. From these results, it looks as though banks took the cheap 12 month money last year, not because they needed it especially, but because the banks were increasing assets. We have identified in these pages that a lot of the debt purchased was registered in Luxembourg but also a lot of particularly shorter maturity government debt was bought.
The easy ECB money has had a double impact: it enabled sovereigns to fund themselves more easily (!) and more cheaply than they would have otherwise plus, it allowed banks to make money (unless they bought Portuguese or Greek debt).
The point we would make it that the ECB is not helping banks as much any more, so what happens?
As CA also notes, with European governments issuing ever-more debt, the take-down for Europe’s banks is becoming more challenging too. Add to that a growing market stigma over owning too many government bonds — for some regions — and you have the possibility of a step-change in bank buying.
However, as the French bank also notes, a lot of that will depend on banks’ own funding abilities.
So what CA is attempting to do is look at banks’ funding profiles — their deposit bases alongside their use of the ECB liquidity — to figure out banks’ future bond-buying proclivities.
The below charts show MFI (ECB-speak for ‘bank’) deposits, deposits from the non-bank sector such as households and corporates, central government deposits and lastly, ECB money. Click to enlarge:
What you want to see in the charts is a big and fairly stable deposit base from outside the banking sector — à la Germany or (shock) even Portugal. What you don’t want are big MFI deposits (Ireland) or heavy ECB-reliance (Greece). Note that from a deposit standpoint, Greece doesn’t look too bad. Its banks have always had relatively large deposit bases, though you can see the start of an outflow in the charts.
So, what do the graphs tell us about the prospect of eurozone banks buying eurozone government bonds? Here’s what Credit Agricole thinks:
Based upon the data to April, we would not imagine that Portuguese, Finnish, Dutch banks would be expanding their assets aggressively by buying government paper unless the ECB becomes super-generous and implement cheap 12 month funding.
In summary, without the cheap ECB money, we are not convinced that banks will be willing buyers of large amounts of government debt. This could show itself in higher core yields or higher peripheral yields in the near future – it will depend a lot upon whether the markets believe that the sovereign debt crisis will be overcome and the relative pace at which the periphery reduces their budget deficits relative to the core. Remember that Greece is not issuing and the rest of the periphery is scrambling to improve their budget deficits. For these reasons we think that once the change in risk sentiment occurs, the core-periphery spreads could contract quickly.
Let’s hope so.
Of course, if they don’t decide to stump up — the ECB could always start buying.
Oh, wait.
Related links:
Scott Sumner and the limits of arbitrage – Rortybomb
Financial stability is getting difficult – FT Alphaville
Charting Europe’s grim sovereign-bank loop – FT Alphaville