European Cash Hoarding Puts Corporations at Default Risk

(Photo: AP)

Banks which accepted cash from the European Central Bank are using it to buy bonds or else are hoarding it and not lending, as it was intended, according to numerous sources, and their actions put corporations at risk of default.

Bloomberg reported Thursday that companies desperate to refinance their debt are getting the cold shoulder from banks awash in cash from the ECB after record long-term loans were extended, and many of those companies will be unable to survive. Instead of extending credit to companies, banks are either putting the money back into deposit with the ECB or are buying bonds with it.

According to Standard & Poor’s, as the European recession deepens, corporate default rates will balloon perhaps to 8.4% or even higher, when at 2011 the rate was 4.8%. The largest oil refiner in the region, Petroplus Holdings, is the latest casualty of hoarding as it declared this week that it would seek bankruptcy after failing to keep access to $2.1 billion in credit lines.

Andrew Cleland-Bogle, a Frankfurt- based director at corporate finance specialist DC Advisory Partners, was quoted saying, “It’s very challenging for anyone to raise money from lenders right now. Combine that with increased bank capital requirements and you can see that although banks are getting money they’re very selective when it comes to lending it. 2012 is going to be a very, very tough year.”

Instead of lending to companies to which they provided initial funding, banks are now making use of the 489 billion euros ($643.7 billion) they borrowed for three years from the ECB at only 1% interest by buying government bonds that pay more than 2.5% interest, making a profit on the loans. Companies are left hanging.

Those which do not buy bonds with the proceeds of the loans are parking funds back with the ECB in overnight deposits; according to the central bank, its 30-day moving average of deposits has swelled to a record 411 billion euros.

John Rathbone, head of J.C. Rathbone Associates, a London-based risk management consulting firm, points to Spain and Italy as taking advantage of “the massive gap between the cost of these funds and the yield on the government bonds” of their own countries.