France, Spain struggle to raise debt

THE EURO zone debt crisis continued to spill over into the global banking system yesterday as Spain and France struggled to raise debt despite heavy buying by the European Central Bank.

Fitch Ratings warned of serious risks for US banks if the crisis spread, while it emerged that British banks are pulling back from lending to Ireland and other peripheral states.

US banks faced a “serious risk” that their creditworthiness would deteriorate if Europe’s debt crisis deepened and spread beyond the five most troubled nations, Fitch said.

“Unless the euro zone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the US banking industry could worsen,” the New York-based rating company said yesterday in a statement.

Separately, it was reported that Britain’s banks have shrunk their lending exposure to peripheral euro zone counterparts by a quarter in just three months as concern deepens about the intensifying crisis on the continent.

According to data compiled by the Financial Times, the big four British banks cut interbank loan volumes by more than 24 per cent to £10.5 billion (€12.3 billion) in the three months to the end of September, reflecting a sharp increase in nervousness towards lenders across the southern euro zone.

The biggest reductions were in loans to Greek and Spanish banks, continuing an earlier pattern, but an Italian loan slump was new.

HSBC, the biggest supplier of credit to other banks, cut its exposures the most sharply, with a 40 per cent overall decline in interbank loans to the region.

It eliminated lending to Greek banks and cut volumes in Spain and Ireland by about two-thirds.

Europe’s banks have $700 billion (€520 billion) worth of debt scheduled to mature over the next nine months. That, combined with the shrinkage of interbank lending and regulatory pressure on banks to raise capital reserves, has prompted bankers to warn of a severe Europe-wide credit crunch.

Fears of a credit crunch grew despite some positive US economic data and heavy buying by the ECB that helped drive the yield on Italy’s 10-year bond back below 7 per cent.

Signs of severe stress appeared elsewhere following sovereign debt auctions in Madrid and Paris.While Italy’s 10-year yield edged below 7 per cent, Spain’s rose towards that level following a poorly received debt auction.

The gap between France’s 10- year yield and that of Germany widened beyond 200 basis points at one point to a euro-era record, but narrowed later in the session.

France sold €3.33 billion of 2016 notes at a yield of 2.82 per cent, more than 50 basis points up from a month ago.

“We suspect auctions will remain a key focus as far as the eye can see and there are little signs of a slowdown,” said Jim Reid at Deutsche Bank, noting that with just 30 business days left before 2011 finished, 31 separate bill and bond auctions would take place across the euro zone.

In the currency markets, the euro pulled away from a five-week low struck against the dollar on Wednesday but struggled to regain the $1.35 mark.

Even the relative safety of German and British government bonds came under pressure, with the bund yield rising five basis points to 1.87 per cent and the yield on the 10-year British gilt up five basis points at 2.22 per cent. – (Copyright The Financial Times Limited 2011/Bloomberg)