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Money markets signs point to banks increasing ecb reliance


* Funding requirements point to increased ECB reliance* Demand seen high at next 3-year financing operation* Signs point to banks gathering collateralBy Kirsten DonovanLONDON, Jan 20 Funding requirements suggest banks will considerably increase their take-up of liquidity from the European Central Bank at the end of February when they have another chance to secure three-year cash. Although some banks have accessed senior bond markets this month - to the tune of 47 billion euros of which around 20 billion euros is senior debt according to Societe Generale - it is a small fraction of the 700 billion euro wall of funding redemptions that the European Banking Association calculates is due this year, mostly in the first half. After an in-depth analysis into take-up at the ECB's first three-year funding operation in December, Morgan Stanley concludes that banks will take a further 150 billion to 400 billion euros of such funds at the end of February, pushing excess liquidity in the banking sector sharply higher from its current level of over 500 billion euros. Spanish and Italian banks have taken between 50 and 150 percent of their 2012 funding needs already, Morgan Stanley calculates, which may explain some of the recent strong demand for shorter-dated Spanish government bonds as the cash is parked until needed for redemptions.

"Those banks which didn't do 100 percent in the first (three-year operation) indicate ...they may do this in February and many may go beyond just 2012," the banks' rate and credit strategists said."This not only materially reduces the risks around funding for these institutions but should in the near term re-assure corporate depositors who have been running down deposits."The spread of unsecured lending rates over overnight index swap rates, which indicate the level of counterparty risk seen in the future, is seen narrowing through 2012.

The so called FRA/OIS spread is around 63 basis points for March, while the December spread is around 43 basis points, according to ICAP data. Reflecting the huge amount of liquidity in the banking system, average current account holdings exceeded the average reserve requirement by as much as 140 billion euros this week, the most since early 2010, according to Reuters data."I think we will again see a high level of demand (at the next three-year tender)," said Simon Smith, Chief Economist at FxPro."Banks see it as the only route at the moment to secure funding and it is the most viable option for providing some policy relief."

Despite the huge amount of longer-term liquidity in the banking system and a halving of reserve requirements, banks actually increased their take-up of one-week ECB funds this week, contrary to expectations. That has pushed the Eonia overnight rate down to just 37 basis points. And there are signs that banks are already readying collateral for February's operation. Analysts have suggested that some of the recent demand at shorter-dated euro zone debt auctions has been banks loading up on eligible assets, while a widening of collateral requirements will see lower-rated asset-backed securities eligible for inclusion, one possible reason that the weekly ECB borrowing rose this week."One factor leading to higher allotments even now could be that some banks are already pulling their collateral together for...the end of February," said Commerzbank rate strategist Benjamin Schroeder."This could for example include the structuring of ABS, where the lowering of the AAA rating threshold to A- has made securitisations from Portugal and Ireland eligible."

Rlpc lenders take guarded approach to ukrainian loans


As attention shifts to Ukraine with last week's kick-off of the 2012 UEFA European Football Championship, international lenders are becoming increasingly wary to lend to borrowers in the country due to escalating political and economic instability. Intensifying speculation by top European governments over the imprisonment and treatment of former Ukrainian Prime Minister Yulia Tymoshenko, as well as concerns over the potentially destabilising impact of a parliamentary election in October, are taking centre stage for investors. Ukraine's economic growth expectations for 2012 have been downgraded, as the export-orientated economy has been heavily knocked by sliding European demand, which accounts for up to 25 percent of its exports. News last week that Ukraine had repaid half of the $2 billion loan extended by Russian lender VTB, marking the largest foreign debt payment due this year has made little impact on syndicated loans bankers, who said loan activity would remain stagnant until the political and economic hurdles - both in Ukraine and the eurozone - were resolved."There was, and is, a definite shrinking of liquidity for loans in Ukraine, as a number of banks decide not to support the borrowers anymore," one European banker said.

Stress in Ukraine's loan market has increased since the middle of last year, when many lenders were forced to pull back from what they considered non-core markets in a bid to rescue their balance sheets amid tightening liquidity. Although Ukraine's syndicated loan volume so far this year is the highest since the first half of 2008 with $475 million, bankers doubt that the annual loan volume for 2012 will match the $2.7 billion generated in 2011. There is hope for well-regarded borrowers willing to accept what lenders consider appropriate terms, with appetite also heavily dependent on "how far down the pecking order the borrower is", a second European banker said. Smaller deal sizes, shorter tenors and higher pricing are now unavoidable.

APPROVAL A group of six Russian and international lenders are seeking credit committee approval of a euro and dollar denominated loan for Ukraine's largest private power and coal producer DTEK, with terms and size expected to be dictated by the lender group.

"Anything more than $300 million is significant for Ukraine," a third European banker said. Ukrainian mining and steel group Metinvest's $325 million loan at the end of May was widely considered a success after increasing from $300 million, marking the country's largest deal this year. Yet lenders' unease with even the top Ukrainian borrowers was demonstrated by the deal's increased pricing and shorter tenor when compared with the miner's $1.2 billion loan in November. Market conditions have significantly slowed progress on Donetsksteel Iron and Steel Works' $750 million, five-year pre-export financing, for which Deutsche Bank was appointed co-ordinator in November. Meanwhile, lenders' appetite for mining group Ferrexpo, which is considering a loan, is yet to be seen, the second European banker added. Some international lenders may use the $412 million of maturing Ukrainian loans this year as an opportunity to exit, with lenders in Ukraine's more liquid neighbours Russia and Turkey stepping in to fill the gap. Russian and Turkish banks have different risk approaches and the top Russian banks, in particular, are keen to flex their lending power across the CEE with huge bilateral loans and a bigger presence on internationally syndicated deals.