LONDON/FRANKFURT Dec 16 European banks face a 725 billion euro funding crunch in 2012, forcing them deeper into the arms of a European Central Bank which is prepared to prop up banks but not governments.
The central bank is throwing European lenders a three-year liquidity lifeline in response to pressure from desperate top executives who have seen interbank lending and funding from wary money market investors come to an abrupt halt.
"There's a huge funding issue in Q1 where a lot of banks have to refinance debt so there's a big crunch coming," a senior banker at a European firm told Reuters on Friday. "Couple that with uncertainty about what's going to happen with the euro and it could be a very interesting first quarter."
European banks need to refinance a record amount of bonds in the first quarter of 2012 which, if the short-term money markets they also use to fund themselves remain closed, will leave them more reliant than ever on ECB support.
Most of Europe's banks have been unable to raise funds in wholesale markets for six months or more and there is unlikely to be much relief in the coming months.
Some 725 billion euros of bank debt matures in 2012, 100 billion more than this year, with 282 billion euros due in the first quarter alone, according to Thomson Reuters data.
In order to provide with greater certainty and promote lending and buying of government bonds, the ECB will from next week provide the region's banks with low price, abundant loans that run for three years.
Banks could take an estimated 250 billion euros at the first auction of the three year loans on Wednesday.
This should help haul banks out of a funding hole, although it may be too late to prevent long-term economic damage as lenders withdraw credit from the region and beyond.
"It's (the ECB funding) helpful in cutting off the risk of a bank failure and cutting off the risk of the markets staying shut, but it's not going to change the deleveraging dynamics," a senior banker said.
Banks are also feeling the pinch from regulators who are demanding they set aside more capital to cushion them from losses further down the line.
BNP Paribas, Societe Generale and Commerzbank are among those withdrawing credit at a pace that has alarmed new ECB chief Mario Draghi and politicians across the bloc.
However by shedding loans and drawing in more retail deposits by offering more attractive rates to savers, banks are closing the gap in their finances.
"It won't be Armageddon in 2012, but we'll be staying close to the cliff edge," a debt market banker said.
The ECB extended the duration of its loans and loosened rules on what banks can use as collateral in response to growing strains in the market.
Europe's grinding debt crisis has seen banks in Spain, Italy and even France massively increase their reliance on the central bank. French banks have almost quadrupled their intake of ECB money since June to 150 billion euros, while banks in Italy and Spain are each taking more than 100 billion euros.
But a worry is that banks are hoarding much of the money rather than lend it on. In fact, they are depositing almost two-thirds of the half a trillion euros borrowed.
Their use of ECB facilities could rise to more than 1 trillion euros during the first quarter, Deutsche Bank analyst Matt Spick estimated.
Fewer than a dozen banks appear able to access wholesale markets by raising senior unsecured debt or covered bonds, and while opportunities may come in the coming months, they could be limited to strong names like HSBC, Deutsche Bank , Rabobank or Standard Chartered, bankers said.
"The market does not believe the European crisis is in any way resolved and until that gets sorted there will be no confidence," a second senior banker said.
STRAINS & STRESSES
The stresses from banks are already spilling into the wider economy, as banks take a harder line on their lending.
French media and telecoms group Vivendi has been forced to raise the pricing on a 1.5 billion euro loan refinancing and Danish brewer Carlsberg is also meeting resistance from banks for a new loan.
A stark retreat in areas like project finance, shipping finance, aviation and infrastructure, as banks get rid of assets funded by U.S. dollars, may be less politically sensitive than cutting lending to small businesses, but it will slow economic growth.
The shipping industry, for example, is facing a major storm from the banks' retreat, with shippers cancelling or delaying orders as owners get strapped for cash.
The situation may get worse: analysts at Morgan Stanley estimate Europe's banks could shed up to 3 trillion euros in the next 2-3 years and up to 4.5 trillion euros in the next 5-6 years as the full extent of the financial crisis becomes clear.