Bank funding strangled by govt debt fears

Fri Nov 18, 2011 10:44am EST
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By Philipp Halstrick and Marius Zaharia

FRANKFURT/LONDON (Reuters) - Fear over European banks' exposure to risky government debt stalked markets and harried bank executives on Friday, as unsecured lending between banks evaporated and the cost of secured loans rose.

Dwindling trust between the banks is forcing them to rely more and more heavily on the European Central Bank (ECB) to fund their activities, which in turn is spooking investors concerned about the health of the countries funding the ECB.

"The crisis has moved from the sovereign market to the inter-bank market. When the crisis reaches there it is extremely difficult to come back," said Luigi Buttiglione, a hedge fund manager at Brevan Howard and a former economist with the Italian Central Bank.

The head of Europe's seventh-largest bank, Deutsche Bank's Josef Ackermann, said on Friday long-term funding was growing hard to obtain.

"Short-term financing is fine, but the big question is how we can ensure long-term funding," Ackermann told reporters at a conference in Frankfurt. "The willingness of investors to make long-term investments in banks is not very pronounced."

A freeze in inter-bank lending ultimately caused the collapse of Lehman Brothers in 2008, signaling the next phase of the credit crisis, and forcing governments to pump billions of dollars of aid into banks to prevent the system collapsing.

Various indicators of money market stress have already spiked in signs investors are increasingly concerned about preserving their cash.

The latest sign of worries about banks' health was the movement of German treasury bill yields, which were heading into negative territory as investors withdrew money from banks and put it in German government short-term paper as a way to preserve cash.   Continued...