KeNo's Housing and Economic Portal: Saturday December 3 Housing and Economic stories

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Banks Face Funding Stress - (online.wsj.com) European banks, increasingly concerned about their ability to access funding, are devising complex and potentially risky new deals that enable them to continue borrowing from the European Central Bank. The banks' moves, which include behind-the-scenes swapping of assets among financial institutions, could heighten risk across Europe's already fragile financial system, say some senior industry officials and regulators. They also are a sign that struggling banks across Europe are preparing for a period of prolonged reliance on financial lifelines from the ECB. The Continent's intensifying financial crisis has made it difficult for many banks to obtain funding from customary market sources. Some banks are exhausting their supplies of assets—such as European government bonds and certain types of asset-backed securities—that the ECB accepts as collateral and that the banks haven't already committed to other uses, according to bankers and analysts. Others are scrambling to stockpile such assets to comfort analysts and investors worried about the banks' abilities to weather a long-term freeze in bank-funding markets.

Greek bond losses put role of CDS in doubt - (www.ft.com) Earlier this year, Deutsche Bank quietly decided to reduce its exposure to Italian government bonds. But it did not do that by simply selling debt; instead it achieved this partly by buying protection against sovereign default with credit derivatives contracts. That duly enabled the doughty German giant to report that its exposure to Italian sovereign bonds had dropped an impressive 88 per cent during the first half of the year – at least, when measured on a net basis – from €8bn to less than €1bn. So far, so sensible; or so it might seem. But there is a crucial catch. These days, it is becoming less clear whether those sovereign CDS contracts really offer effective “insurance” against default. And that in turn raises a more unnerving question: if the exposures of the large European banks were measured in gross, not net, terms, just how much more vulnerable might they be to sovereign shocks? Or, to put it another way, could the problems now hanging over eurozone banks and bond markets be about to get worse, due to the state of the sovereign CDS sector?

UniCredit Trading as Junk With $51 Billion of Bonds Due: Corporate Finance - (www.bloomberg.com) Bonds of UniCredit SpA (UCG), the Italian bank that posted a surprise 10.6 billion-euro ($14.3 billion) third-quarter loss this week, are trading as junk as the lender prepares to refinance $51 billion of debt coming due next year. Fixed-income investors are pricing the Milan-based lender’s bonds at levels that imply a rating of B1, four levels below investment grade and eight steps lower than its A2 ranking, according to Moody’s Analytics. The 13.4 billion euros of UniCredit debt securities that are contained in Bank of America Merrill Lynch’s Euro Corporates Banking index have lost 2.8 billion euros since the start of June. UniCredit, Italy’s biggest bank, has the highest amount of bonds maturing in 2012 by a major European lender, according to data compiled by Bloomberg. Concern that Italy will struggle to cut Europe’s second-highest debt load and tame the sovereign crisis drove the country’s debt yields to euro-era records, infecting UniCredit’s 40 billion euros of Italian bonds.

French banks bear brunt of debt turmoil - (www.ft.com) French Finance Minister Francois Baroin risked renewing a clash with Germany over using the European Central Bank as a backstop, saying that ECB support for Europe’s recue fund is the best way to counter the debt crisis. Baroin’s comments underscore French unease as the debt crisis moves to the euro region’s second-largest economy. The extra yield demanded by investors to hold French 10-year bonds over German bunds widened to a euro-era high today. “We consider that the best way to avoid contagion is to have a solid firewall” by giving the fund a bank license, Baroin said in a speech in Paris late yesterday. “We haven’t won the argument. We won’t make it a casus belli, but naturally we continue to think it would be the best way to bring stability to Europe.” As global leaders step up calls on Europe to find a fix to the crisis now entering its third year, the French stance is again running into resistance from German Chancellor Angela Merkel’s government, which opposes enlisting further support from the ECB.

Spanish bond yields near critical level - (www.ft.com) Spain on Thursday paid an average yield of 6.975 per cent to issue €3.6bn of 10-year bonds, nearing the 7 per cent level widely regarded as unsustainable and underlining the extreme strain in eurozone sovereign bond markets. Last month, Spain issued 10-year bonds at 5.433 per cent. In Thursday’s auction, the bid-to-cover ratio was an unimpressive 1.5 times and the yield was the highest Spain has paid since 1997. Turmoil in the eurozone’s sovereign debt markets and fears of defaults had driven Spain’s 10-year bond yields in the secondary market to a euro-era high of 6.73 per cent.

That surpassed the level that prompted the European Central Bank to start buying Spanish bonds, along with those of Italy, in August.

In debt talks’ new phase, blame game overshadows fiscal blueprint - (www.washingtonpost.com) Negotiations over the national debt entered a troubling new phase Wednesday on Capitol Hill as lawmakers appeared to spend more time trading blame for the impasse than in talks aimed at developing a blueprint to reduce borrowing. With a Thanksgiving deadline getting closer, Democrats on the bipartisan “super-committee” revealed details of a plan they offered to Republicans late last week that would have cut spending by nearly $900 billion over the next decade in exchange for just $400 billion in new taxes. The proposal represents an apparent shift from earlier Democratic debt-reduction proposals, which demanded as much as $1.3 trillion in new taxes through 2021. It also appeared to mark a big step toward the latest Republican position, which called for about $300 billion in new taxes. But Republicans said the offer was a ruse that included at least $800 billion in new taxes from the expiration of the George W. Bush-era tax cuts in January.