Europe's banks go on a borrowing binge

Hundreds of billions of dollars are in play. Is this a good move, or did the eurozone take on a lot more risk?

By Jim J. Jubak Dec 21, 2011 3:13PM
The European Central Bank held a borrowing party Wednesday and everybody came.

A whopping 523 eurozone banks borrowed a huge 489 billion euros ($638 billion) at the central bank’s first offering of three-year cash.

That’s enough to refinance 63% of the debt, as estimated by Goldman Sachs, of eurozone banks that will mature and require refinancing next year. The European Central Bank’s next three-year funding will be held in February. At this rate, eurozone banks will be able to pre-fund all their refinancing needs for 2012 and into 2013 that month.

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This is either a big step forward in assuring the stability of the European banking system or the next step in building a horrifyingly risky Ponzi scheme. In my view, it’s some of both, but we won’t know how to weigh the good against the bad until we see what banks do with this money.

The cash offering is certainly a good thing since many eurozone banks have been locked out of the financial markets -- they literally didn’t have an alternative source of funding for their 2012 refinancing needs. Sales of senior unsecured bank bonds have dropped by 80% since July compared to the same period in 2010, according to Morgan Stanley. 

Before today’s offering, bank analysts an economists had feared that banks would shun the money and the potential stigma that might attach to admitting that a bank was shut out of the financial markets despite an estimated 600 billion euros in bank debt that needed refunding in 2012.

That would have left the European banking system staring straight down the barrel of a funding crisis.

Now that crisis seems to have been averted.

But what will the banks do with their cash?

There’s intense pressure from some eurozone political leaders, most vocally Nicolas Sarkozy of France, for the banks to put a big chunk of this cash into the government bonds of their home countries. The argument goes that the banks could make a big profit by borrowing from the European Central Bank at a current 1% rate and then buying bonds of France, Italy, Spain, etc. that are paying much higher yields.

This would also have the effect, these leaders hope, of reducing the market pressure on those government bonds.

It would also create a massive Ponzi scheme where banks borrowed from the European Central Bank, used that cash to buy government bonds, and then used those bonds as collateral for more borrowing from the European Central Bank.

Such a scheme would work only until the amount of sovereign debt in the system caused the whole pyramid to break down when either a bank went bust -- because the central bank finally cut off credit or tightened its collateral rules -- or a country experienced a debt crisis that caused the value of the bonds held by national banks and the European Central Bank to plunge.

So far, fortunately, most banks seem to be resisting the pressure to bail out sovereign governments by putting their own balance sheets at risk. Banks, especially those that still have some access to the financial markets, know that investors are watching reports of their holdings of sovereign debt extremely closely. There’s little point in buying government bonds to pick up a profit on the yield spread if it costs a bank access to the financial markets, results in a falling share price, and produces a downgrade from one of the credit rating companies.

As of the last data banks from Spain’s Banco Santander (STD) to Germany’s Deutsche Bank have been cutting their exposure to sovereign debt from Italy and Spain.

The latest data, however, comes with a considerable lag. And it’s an open question what banks will do with their cash from the European Central Bank’s December and February fundings.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Banco Santander as of the end of September. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

Tags: STD
Dec 21, 2011 5:31PM


Where did the ECB get all that cash to lend?  Are our taxes going up?


So the banks that borrowed will allocate that money into cubby holes that creditors, shareholders and depositors cannot touch, then declare bankruptcy.


Sorry, I can't help it.  I just started reading Ellen Schultz's book "Retirement Heist" and it's putting the worry in me.


Full Disclosure:  I own no shares of Penguin Books.



Dec 21, 2011 6:25PM

Here we go again.  Borrow until hurts or until someone ask "show me the money".  What a shell game.


Dec 21, 2011 9:54PM
We should disassoicate with the Europeans as rapidly as possible.  They make the clowns that have been running this country look like Einstein.
Dec 21, 2011 7:37PM
Nothing different than what the US does every day,a trillion + a year we spend that we borrow.
Dec 21, 2011 11:42PM
Doesn't sound too different than what we are doing.  We need to look in the mirror at ourselves.
Dec 22, 2011 12:38PM

how about BANKRUPTING your balance sheet and starting over AGAIN...the short term pain in terms of years will outweigh the long-term death spiral


Dec 21, 2011 9:59PM

sounds like a wire and mirror fix these nations have to be willing to change philosophy

quit looking for big govt handouts or they will all go down

Dec 22, 2011 12:39PM
what's fkd up is the euro is worth a $1.37; how is that so???????????????
Dec 21, 2011 11:43PM
If I have my facts and figures correct .. at the G-20 meeting in Cannies France in early November, and subsequent EU meeting in early December .. European countries pledged to boost their funding to the EU Central Bank.  Could it be that we are seeing a short term sovereign euro-zone investment in the form of a liquidity move for euro-zone banks, in combination with "investment" from the other G-20 countries via of the ECB and IMF in the form of a EU TARP?  see testimony of Steven B. Kamin, Director, Division of International Finance 12/16/2011 before the House sub-committee, at the Federal Reserve web site.
Dec 21, 2011 6:38PM
Sad Time for bernanke to lower the interest rates to help his english buddies and I would bet he do too.
Dec 22, 2011 2:18PM
Not withstanding that the ECB createdndreds of billions of Euros but that the Euro didn't drop about 3%-5% on the news. I wonder who is propering up the Euro? I can only imagine that lots of hedge funds would use this info to start driving the Euro down. It would definitely benefit the PIIGS to have a weak Euro. Even France and Germany could ramp up exports with a weaker Euro.
Dec 22, 2011 12:47PM


At least this European madness buys us on this side of the pond maybe two more years to work, invest, and keep paying down the mortgage.


So on a vacation to anywhere in Europe, I bet on the hotel bill, the rental car,  the restaurant meal, the taxi cab ride, there will be a bailout tax added.  They'll probably install pay toilets.  "One Euro if you have to go."


Hmmm.  I can see a new ABC television sitcom here.     Wink



Dec 21, 2011 9:56PM
All you have to do is listen to a fellow named Michael Ruppert and you can understand what the hell is going on. If you don't know who he is, look him up online and you'll see what i'm talking about. He made the statement that, "you can only print as much money as you have energy to back it with". That energy is in the form of oil, gold, food, etc. etc. This makes perfect sense, and also explains the REAL reason we went to war with Iraq. Remember Bush said we were there for, "weapons of mass destruction" first then changed it to "Terrorism"  as the reason. How about the truth? OIL!!!   
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