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Credit is drying up for mid-tier European banks because lenders are seeing a liquidity crisis on the horizon, according to International Financing Review.Investment banks are withdrawing cash handouts because of the sovereign debt crisis — and in turn creating a liquidity crisis.
This spells bad news for Spanish and Italian banks which could count on these currency reserves only a few weeks ago, and will need financing to meet their maturing financial commitments.
“Everyone has been cutting off their exposure,” said the head of another European investment bank. “It started with Greece, then Spain and now Italy. People don’t want to do business with these banks. Many of them have good underlying businesses but they are stuffed.”
Before recent developments, repo markets were steadily gaining importance for banks. The facilities, financial market equivalents of pawn shops which allow banks to borrow against collateral for specific time periods, helped many firms generate cash out of assets sitting on banks’ balance sheets.
Demand for European Central Bank funds is up to €500 billion ($711.5 billion) from €400 billion in the spring. The report calls this uptick — albeit small — an ominous sign that the eurozone debt crisis is worsening quickly.
Though the ECB will continue lending to banks with a BBB- rating and above, it also stands the chance of running out of cash before that point, causing panic:
If ECB eligible collateral runs out, banks will have little option but to sell off assets in a final fire sale, say bankers. That will depend on whether there are willing buyers for such assets, much of which were accumulated pre-2007 as retail, commercial and wholesale loans.