LONDON — Banks will use the European Central Bank’s cheap cash to pay off a massive wall of maturing debt coming due next year and boost capital ahead of the next round of stress tests, rather than to buy the sovereign debt of peripheral countries, analysts said Thursday.
Some 24 hours after the ECB announced a record $639 billion take-up of cheap three-year loans by 523 eurozone banks, market sentiment suggests that banks will play it safe rather than risk taking more loans onto their balance sheets and facing further “haircuts,” or writing down debt.
Bank shares across Europe crept up 2 percent to 3 percent Thursday, and the Stoxx Europe 600 bank index was up 1.6 percent.
“Only the weaker banks may decide to buy sovereign debt — the ones that have already taken haircuts and are cut off from wholesale funding — they have nothing to lose and are betting on red,” said Martin van Vliet, an analyst at ING. “Most of the larger European banks are reducing their exposure to peripheral sovereign debt because of the mark-to-market issues and reputational risk.”
The bulk of the cash will be used to meet strict regulatory capital requirements under Basel III and revised stress tests that require European banks to come up with a total of $149.7 billion in new capital by June.
