EUR kidding me

3 April 2012 By George Hay Follow @gfhay

Some lenders are enjoying a temporary uplift from buying high-yielding sovereign debt financed by the central bank’s cheap three-year loans. Banks are reluctant to spell out the extent of the improvement. But as first quarter results approach, investors should demand clarity.

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The cost of insuring five-year European senior bank debt, as measured by the Itraxx Senior Financials index, has fallen by 34 percent to 215 basis points since mid-December, just before the first of European Central Bank’s longer-term refinancing operations (LTRO) came into effect. One-year Euribor rates are currently 1.4 percent. The STOXX-600 index of leading European bank shares has risen 18 percent since early January.
Southern European banks increased holdings of domestic sovereign debt in February, according to data released on March 28 by the European Central Bank. Lenders increased their sovereign risk exposure by 14.2 percent in Portugal, 7.7 percent in Greece, 7.7 percent in Italy and 7.1 percent in Spain.
UniCredit, BNP Paribas and Societe Generale are among those large banks pondering whether to repay their LTRO money before it matures in 2014/15, the Financial Times reported on April 2.

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