European Banks At Risk After ECB Adjusts Collateral Discounts

Spanish banks risk their troubles being compounded by a jump in the cost of lifeblood funding from the European Central Bank.

A one-notch downgrade by a single credit rating agency is all that stands between them and a financial blow that would pressure the ECB to act, but probably not with its OMT bond-buy plan.

Lenders in Italy and Ireland face a similar threat.

An ECB adjustment earlier this month of the haircuts – or discounts – it imposes on collateral put up to obtain cash at its refinancing operations means government bonds with ‘A’ ratings are treated more favorably than previously, while the penalty applied to those with lower ratings is more severe.

That liquidity has been a lifeline for many banks who have been shunned by peers in the interbank lending market.

The bonds of Spain, Italy and Ireland sit in the top group, but are dangerously close to slipping into the lower category.

A dent to banks in either Spain or Italy could further choke off lending and prolong recession in the euro zone’s south, which is beset by sky-high unemployment even though Spain’s two-year slump shows signs of coming to an end.

via Reuters

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