Liquidity relief in the U.S. may not translate across the Atlantic, and analysts in Europe have begun positing how Europe would benefit from the $75 billion master liquidity enhancement conduit (M-LEC), set up primarily by Bank of America, Citigroup and JPMorgan Chase with the U.S. Treasury Department.
While many institutions have already officially declared their support for the trust, it's unlikely that the Continent will replicate a similar setup; nonetheless, European banks are already coming up with similar solutions.
"We believe this will provide much needed support to a market where the potential for large SIV unwinds has kept spreads wider than credit risk implies," said Christopher Greener, director and ABS senior credit research analyst at Societe Generale. He added that he believes the extra layer of liquidity that will be added by M-LEC to boost investor confidence is a wise decision, as resultant notes should have very little liquidity or credit risk attached. "We believe this should stabilize SIV ABCP/MTN spreads somewhat and ensure funding is available for those vehicles which are eligible [for M-LEC relief]," he said.
Analysts at Deutsche Bank, however, remarked that it is still too early to determine what exact impact M-LEC will have on Europe. "Details remain sketchy, but from what we can tell, the vehicle will fund by issuing ABCP with full backstop liquidity," reported analysts at the bank. "Thus, in effect, [it takes] the short-term financing constraints away from SIVs in return for what looks like a vertical slice' of the SIVs assets.
"Our tentative view at this early stage is that this marketwide exercise may significantly diminish the immediate threat of SIV asset overhang," they added, "a positive for secondary pricing, but [it] looks unlikely in itself to re-establish the SIV business model, which means that the vacuum in near-term primary market demand is likely to remain."
Moody's Investors Service has also come out in support of the conduit by stating that it expects a generally positive impact on the European SIV sector. The agency reported last week that SIV holdings had fallen by $75 billion since July, to $320 billion in September, but said that in the future, it intends to consider the potential impact of the new initiative along with the exposure of each vehicle to credit and liquidity risks when monitoring its SIV ratings.
The initiative is expected to help stabilize SIV funding in the U.S. ABCP markets, but some market pundits are still not sure if M-LEC will make any impact on the Continent. One European investment banking source explained that the liquidity conduit will not be operational for at least another three months, by which time the market will have returned to normal on its own. "Anyway, the only people losing money at the moment are those who are selling their bonds," said the banking source.
And he wasn't alone in his opinion: Another market observer who works for a consultancy firm said she found M-LEC to be "a funny thing where governments and banks start putting money in the bank." Indeed, market skepticism of proposed solutions have echoed the aforementioned concerns, as the recent attempts of the Bank of England to offer aid through a series of four auctions failed, with no bidders coming to market.
But that's not to say Europeans can't help themselves. Milan-based Banca Italease, which had been hit hard by its exposure to U.S. subprime mortgages, announced on Oct. 12 that it had secured 950 million ($1.34 billion) in financing, for a term of 18 months less one day, to be used "for achieving a better funding strategy," the bank said in a statement. The main source of funding is provided by other Italian banks such as Gruppo Banco Popolare, Banca Popolare di Milano, Banca Popolare di Sondrio and Banca Popolare delliEmilia Romagna.
However, the bank's chief financial officer, Stefano Rossi, objected to the English-language version of the bank's announcement, which refers to the funding as a stability pact. "The liquidity is to optimize our costs with funding," he said.
"We've arranged for 450 million so far, in order to help resume the normal activities of the bank," said Rossi. "We had exposure to subprime ABS, and now the market is almost closed, so we needed to find a new source of funding for our portfolio, and this is the first step." Rossi said that in the future, the banks would be looking into "covered bond options" when it came to long-term investments.
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