Cash injection from ECB eases borrowing EU costs

THE European Central Bank’s unprecedented cash injection is easing borrowing costs for Italy, Spain and Belgium, compensating for the lack of a solution to the debt crisis and the risk of recession.

Two-year Italian yields have dropped by 50 basis points and Belgian notes of the same maturity have declined by 22 basis points since December 21, when the ECB supplied banks with €489 billion of three-year loans. Short-dated Italian and Spanish debt outperformed AAA rated German and Dutch securities during that period.

“Short-term borrowing costs have come down significantly and that certainly helps to buy time,” said Jens Nordvig, managing director of currency research at Nomura Holdings in New York. “Six weeks ago, it looked as if there was going to be an imminent funding crisis, but that’s averted by the ECB’s money injection.”

The ECB, led by president Mario Draghi, cut its key interest rate last month for the second time in a quarter and offered unlimited three-year cash at 1% to persuade banks, saddled with deteriorating assets including bonds from so-called peripheral Europe, to keep providing credit to the region. Some of that money is probably being invested in sovereign debt, said Fabrizio Fiorini, who helps oversee $8 billion as chief investment officer at Aletti Gestielle SGR SpA in Milan.

The central bank has also bought bonds to curb rising yields. Italy’s 10-year borrowing cost topped 7% in November, the level that prompted Greece, Portugal and Ireland to seek bailouts, and has been stuck at about 6.9% this week.

Italian notes maturing within three years handed investors a 1.04% gain since December 21, beating a 0.09% return from German debt and a 0.15% advance for Finnish securities, bond indexes compiled Bank of America Merrill Lynch show. Spanish notes returned 0.43%. The Stoxx Europe 600 Index has risen 5.6% since the ECB allotted the funds.

The European Commission cut its 2012 growth forecast by more than half to 0.5% in November, while Luxembourg Prime Minister Jean-Claude Juncker said on Wednesday the region is “on the brink of a recession of which one doesn’t yet know its scope.” The euro posted its first back-to-back annual losses against the dollar in a decade last year.

Standard & Poor’s said on December 15 that it was reviewing the credit ratings of 15 euro nations for a possible downgrade, including AAA rated Germany and France, citing “systemic stress in the eurozone.”

France sold €7.96 billion of bond maturing in 2021, 2023, 2035 and 2041 yesterday, with borrowing costs rising in its first auction of the year. The debt maturing in 2021 was sold at an average yield of 3.29%, up from 3.18% in the previous auction on December 1. With European leaders failing to come up with what German Chancellor Angela Merkel described as a “big-bang” solution to the crisis, the ECB has taken unprecedented steps to prevent the crisis from spreading.