Funding dries up for Italy and Spain

SPANISH and Italian banks may have to curtail lending, threatening the European economy, as funding markets freeze amid the region’s sovereign debt crisis.

Yields on the two countries’ government bonds have climbed to records this week amid speculation that EU leaders will struggle to avert the eurozone’s first default. That’s pushed up the cost of borrowing for banks including UniCredit, Italy’s biggest, and Banco Santander, Spain’s largest.

The five biggest banks in each of the two countries have about €240 billion of debt maturing by 2013, according to data compiled by Bloomberg. They haven’t sold bonds since June, and money market rates show the interbank lending market is freezing. That may force banks to curtail lending, which could tip the region’s economy into recession just as governments are struggling with record deficits.

“It may create a slowdown in economic activity,” Jean Pierre Mustier, head of corporate and investment banking at UniCredit, said in an interview.

“There’s a disconnect between the markets and human ability to solve the crisis. We need to buy time.”

Banks across western Europe sold about €7.3bn of euro-denominated debt last month, down from €13.8bn in June and €33bn in May, Bloomberg data show.

Lenders in Spain and Italy have been unable to sell bonds: the last sale of more than €500 million was June, when Santander sold €1bn of covered bonds backed by loans to local governments.

In Italy, the most recent sale was a €750m offering of senior notes by Mediobanca in June.

The cost of insuring European bank debt against default surged to a record yesterday. The Markit iTraxx Financial Index linked to senior debt of 25 European banks and insurers rose to 211 basis points yesterday.

Picture: An employee of the Greek Stock Exchange yesterday. Picture: AP