Worried Banks Pose Obstacle to Forming Financial Union - NYTimes.com - 0 views
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French loans to Spanish banks plunged 34 percent in the fourth quarter of 2011 compared with the previous quarter, according to the latest data from the Bank for International Settlements.
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For Italian banks, French bankers cut their exposure by 16 percent. German banks have also been increasingly wary of their Italian and Spanish peers, reducing lending to them by about 19 percent last year
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In the last six months, as fears about Spain and Greece have intensified, Spanish and Italian banks have been by far the biggest users of the European Central Bank’s program of cut-rate, three-year loans to banks that cannot find money elsewhere.
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But instead of funneling that money back into the Spanish and Greek economies as loans to cash-starved businesses and individuals, these banks have become the primary buyers of their governments’ bonds.
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Most delicate will be whether the Spanish banks receiving the largest cash injections, like the nationalized mortgage giant Bankia, will be forced to impose losses on holders of their subordinated bonds. Those are the investors whose bonds are not backed by collateral and are thus considered more risky.
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In Spain, though, the problem is that 62 percent of the holders of Bankia’s subordinated debt are Spanish individual investors, not overseas hedge funds and investment banks. It is not likely that Madrid will be willing to hit those citizens with a 65 percent loss — the loans are currently priced at about 35 cents on the dollar — at a time of 25 percent unemployment in the country.
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“There are compelling reasons for the euro zone to insist on losses for subordinated and even senior bondholders, the least of which is a reduction in moral hazard,” said Adam Lerrick, an expert on banking and sovereign debt at the American Enterprise Institute. “Losses for bondholders is now euro zone policy, so Europe’s credibility is also at stake.”