* ECB collateral easing take pressure off Spanish banks
* Spillover into government bond market drives yields lower
* Relief may prove short-lived, outlook hinges on EU summit
By William James
LONDON, June 22 (Reuters) – Spanish bonds rallied for a
fourth consecutive day on Friday after the ECB relaxed its
collateral rules, bolstering investors’ conviction that
policymakers were taking steps to alleviate pressure on the euro
zone’s fourth largest economy.
The European Central Bank said it would allow financial
institutions to pledge a wider range of assets, including
collateral of a lower quality, in exchange for cash at its
regular monetary operations.
The move was designed to help ease pressure on Spanish banks
whose deteriorating assets have restricted access to much-needed
ECB cash. Because Spain’s banks are the main buyers of Spanish
government debt, the move helped push down bond yields.
“The ECB had to do it help the Spanish banks, to give them
some kind of relief so they would still have a sufficient
collateral base,” said Niels From, chief analyst at Nordea.
“It was an important move for the Spanish banks and in that
sense, very important for Spain.”
Spanish 10-year yields fell 21 bps to 6.41
percent. After peaking around 7.3 percent earlier this week
yields have fallen as investors take the view that policymakers
will put in place the building blocks of a lasting solution to
the bloc’s long-running debt crisis.
Spain’s economy minister said a formal request for banking
aid, agreed earlier this month to help recapitalise banks that
have lost heavily on property portfolios, was expected to be
submitted on Monday. An initial independent audit of the banks
suggested up to 62 billion euros may be needed.
SUMMIT EXPECTATIONS
The leaders of Germany, France, Italy and Spain agreed on
Friday that the European Union should adopt a series of growth
measures worth about 1 percent of the region’s economic output,
Italian Prime Minister Mario Monti said after a four-way summit
in Rome.
The short-term outlook now turns on whether a June 28-29 EU
summit can back up the expectations of some concrete progress
towards fiscal integration and allowing the bloc’s rescue funds
to buy government debt.
In the lead up to that summit the traders said the market
was expected to be volatile, and relief generated by the ECB
collateral moves may not last.
“We think it’s the right reaction (to the collateral moves),
they were broader than initial expectations,” one bond trader
said.
“But, to the same extent we don’t feel as though this relief
will last. It’s a short term move, another patch and we think
people will continue to flatten positions into the EU summit –
which will ultimately disappoint.”
That meant peripheral yields were likely to rise at some
point over the next week, market participants said, but the
outlook for Bunds was less clear cut.
German Bund futures, which typically benefit in
times of stress, fell 66 ticks to 140.86 and are on course for
their worst monthly percentage fall since February 1994,
according to Reuters charts.
The perceived growing negative impact on Germany’s
creditworthiness from the mounting euro zone bailout bill has
curbed some investors’ appetite for the ultra-low yields on
offer.
“I’m not that crazy about Bunds because I’m not so sure
they’re risk free,” said Patrick Rudden, portfolio manager, at
Alliance Bernstein, who manages $200 million of the company’s
$418 billion of assets.
