First, a chart from ICMA’s December 2010 European repo survey:
It’s newly relevant in August 2011. The clue lies in the share of repo collateral rated BBB- and below (in other words – rubbish assets on balance sheets). It was 5.1 per cent in December, a marked increase compared to a year earlier and part of the trend to secured lending. (Which had itself made unsecured interbank lending rates difficult to trust as indicators of market activity and thus, risk.) Anyway, 5.1 per cent is the number to note.
Though it’s probably a lot less than that now.
Here’s an interesting spot by the team at IFR:
Though small as a proportion of the region’s entire €5.91trn repo market, the use of assets with a rating of below BBB– accounted for 5.1% of all transactions in December, up from 1.2% a year earlier.
That has now largely stopped, say bankers once heavily involved in such deals. Previously, they were able to hedge their exposures to such collateral – or repackage the collateral on behalf of clients to sell off in chunks to fund managers. But growing investor concern, and a rush towards safer assets, has meant that neither investment banks nor investors want to go near the stuff.
“We’ve attempted to do some trades with illiquid assets on behalf of peripheral banks, but we haven’t managed to syndicate deals,” said one senior banker that helped repackage some past deals. “Anything slightly peripheral-orientated is completely out of the question right now.”
The issue being what’s “slightly peripheral-orientated”.
Obviously this affects banks in the deep periphery quite a lot, because they’ve seen quite a few assets turn illiquid and towards junk over the last year because of changes in sovereign credit. Moreover, they’ve had to take some assets to private markets because they can no longer pledge them as collateral at the ECB, owing to tighter rules on ABS ratings requirements. That rule is important as it means banks couldn’t come back to the ECB in a full-blown liquidity crisis without ratings waivers. In any case this reversal in collateralised lending is bad news for Irish, Greek (and likely Cypriot) and Portuguese banks, who all have these suffering assets (but also access to sovereign-guaranteed collateral).
But what if the flight of the rubbish stuff is just a canary in the coalmine?
We’ve already noted that Italian banks have been pledging far more collateral at the ECB in the last month or two. It’s unusual, because Italian lenders pioneered collateralised interbank lending after the crisis. Not much of their collateral is officially rubbish in terms of ratings, but clearly you’d expect a lot of Italian sovereign exposure. (Spanish banks borrowed €57bn from the ECB in July, from €40bn during June.) Basically how far does “name risk” go now?
We’ve also already wondered if the increase in Euribor-OIS spreads recently reflects a much tougher collateralised market, with collateral effectively being thrown out in some cases. Therefore issuers would go into unsecured markets again even if it’s at cost. It’s also been argued that the widening spread actually reflects extra ECB liquidity having an effect on the Eonia overnight secured rate. (Although isn’t that a collateral effect too?)
Ultimately, if Euribor does reflect collateralised pressures, you could really only tell how far it extends beyond the deep periphery through looking at individual bank quote submissions to the Euribor panel. It definitely isn’t the whole picture for what’s going on in markets, so take the below with a pinch of salt.
Anyway, variation in 3-month Euribor quotes (green is lowest, red highest):
Although as for variation in 7-day Euribor quotes:
One last chart — there’s been quite a synchronised plunge in long-term Eurepo rates lately (the rate includes collateral drawn from Eurepo GC):
Hunting for quality collateral out there just a bit?
By Joseph Cotterill and Izabella Kaminska
Related links:
The collateral crunch – FT Alphaville
Euribor has been vaporised – FT Alphaville