| MILAN, Sept 12
MILAN, Sept 12 British clearing house
LCH.Clearnet has dropped a guarantee on Italian government
bonds' repo transactions, potentially hurting an important
funding channel for Italian banks while many still grapple with
The move increases the potential risk for investors settling
Italian government bond repos - short-term loans guaranteed by
Italian debt securities - through LCH, analysts said.
The decision, buried in an Aug. 2 update of its complex
clearing rule book, came after months of wrangling with Italian
and European authorities, which were sceptical about the move, a
source close to the matter told Reuters.
It introduces a 'cash settlement' in case of default of
counterparty Cassa Compensazione e Garanzia (CCG), freeing LCH
from a previous obligation to protect repo lenders.
"The Bank of Italy and the Treasury, as well as the European
Central Bank, all expressed scepticism about the move," the
source said, adding LCH had initially wanted to introduce the
change in early 2013.
The source also said that LCH separately lowered earlier
this year the maximum exposure it was prepared to take on
Italian debt for a single client, potentially curbing investors'
ability to trade on Italian bonds if market activity were to
rise back to pre-crisis levels.
The Bank of Italy, the Treasury, the ECB and LCH had no
Citi estimates Italian banks have around 130 billion euros
($172.9 bln) in funding raised through private repo transaction,
making them the largest private repo borrowers in Europe. More
than half of that figure goes through LCH, they say.
Italian lenders will now be pushed to seek bilateral repo
lines, which are likely to be smaller and costlier than when LCH
was involved as an intermediary, Citi analysts believe.
Much of the 160 billion euro increase in Italian bond
holdings at domestic banks seen since mid-2010 is likely to have
been funded on repo, Citi says.
"Against this backdrop, the risk-reward in both sovereign
and bank bonds seems uncompelling. We recommend selling
(Italian) BTPs versus (German) Bunds or (Spanish) Bonos, selling
the sovereign basis, and selling Italian bank bonds against
Italian corporates or against banks in the core," they wrote.
LCH's decision, though consistent with regulatory
guidelines, surprised analysts and traders as it came while
risks of a euro zone break-up have abated and Italy's economy is
expected to emerge from a two-year recession this quarter.
While yields on Italian government bonds have receded from
the risky peaks hit in late 2011 and again last summer, the
threat of an imminent new government crisis has eroded their
appeal compared to Spanish bonds this month.
The London Stock Exchange group controls both LCH
Clearnet and Italy's CCG. The two have had worked in partnership
for the last 10 years. ($1 = 0.7518 euros)