Role reversal as blue-chip firms bail out Europe’s ailing banks
One source with knowledge of the so-called repo deals or short-term secured lending, said the two US pharmaceutical groups and the French car maker were the latest to sign up for them.
Europe’s banks are struggling to secure cash to fund their day-to-day business and have largely stopped lending to each other for fear Europe’s sovereign debt crisis could land any of their peers in trouble.
As a result a group of well-known, cash-rich companies with solid cash flows has stepped into the repo market, which provides a form of lending so far almost exclusively in use between banks, and between banks and central banks.
Repos provide the new financiers with the strict guarantees they need before parting with their cash, answering worries that the crisis has weakened Europe’s banks to the extent that they might not be able to pay the money back.
“Companies in the past were ... happy to deposit cash on an unsecured basis to a bank for an interest payment,” said Frank Reiss of Euroclear, the Brussels-based settlement house.
“Now following the crisis, we have seen that companies are engaging in repos secured with collateral against the cash they are lending,” said Reiss.
At the moment the European Central Bank provides the main lifeline for banks and has pumped hundreds of billions of euro of cash into the market. But the banks are parking most of the money they borrow back at the ECB rather than trusting to lend to each other.
Europe’s biggest companies are sitting on cash piles that amount to more than $20 billion (€15.7bn) each in the case of BP and Volkswagen.
Regulators cracking down on “shadow banking” — closed-door deals blamed in part for the 2008 financial crisis — have expressed worries about how opaque the repo market is.
In a repo trade, one party buys collateral from the other, with the obligation to sell it back at a pre-defined later date and for a slightly lower price — the so-called haircut. That way, the seller provides cash to the buyer.
When companies rather than banks engage in repo deals they typically rely on a third party for administering the collateral, in what are known as triparty repos.
The triparty market grew at 22.3% in the first half of last year, a survey by the International Capital Market Association (ICMA) showed.
The European repo market was worth €6.2 trillion in the first half of 2011, according to ICMA’s September survey.
