LONDON Nov 9 A decision by two key clearing
houses on Wednesday will make it more expensive for European
banks to use Italian bonds as collateral to borrow in the
secured-lending market, potentially increasing their reliance on
The cost of using Italian bonds to raise funds rose after
clearing houses LCH.Clearnet SA and Italian CC&G increased the
margin on repo trades using debt from the euro zone's third
largest country, as Italian yields hit unsustainable levels.
The move means it will be less expensive for banks to borrow
using Italian bonds as collateral at the European Central Bank
than between each other.
This is likely to increase demand for ECB funding from
banks, and in turn the liquidity in the banking system putting
downward pressure on overnight Eonia rates for example.
"The associated margins for the ECB repo (repurchasing)
operations are considerably less than with LCH. The immediate
response to the ... increase in the initial LCH margin call is
to shift funding further towards the ECB, thereby pushing up
excess reserves and placing further softening pressure on
short-term rates," Simon Peck, rate strategist at RBS said.
Three-month Italian general collateral (GC) was bid at
around 1.65 percent early on Wednesday, up from 1.5 percent in
the previous session, according to ICAP. That compared the
German equivalent which was little changed on the day at 0.39
LCH.Clearnet SA raised the initial margin call applied to
Italian debt by between 3.5 and 5 percentage points across all
maturities of BTP and inflation-linked BTP government bonds.
The changes, which include raising the initial margin call
on 7- to 10-year debt by 5 percentage points to 11.65 percent,
will come into effect on Nov. 9 at the market close and will
affect margin calls from Nov. 10, Paris-based LCH.Clearnet SA
said on its website. The margin at the European Central Bank on
the equivalent Italian bonds is percent.
Italian domestic clearer Cassa di Compensazione e Garanzia
(CC&G) raised its margins to the same level.
"Banks that have huge holdings of Italian bonds will
increase borrowing from the ECB instead of going to the repo
market because now it is more expensive for them to borrow
through LCH," said ING rate strategist Alessandro Giansanti.
Demand for ECB funding from Italian banks may also increase
as they struggle to raise cash in money markets, a trader said.
For months now investors were fearing that Italy -- the euro
zone's third largest economy -- could become the next victim of
the euro zone debt crisis and the market moves and margin
increase were beginning to confirm their worst fears.
Yields on Italian 10-year bonds soared above the
psychologically important 7 percent to 7.5 percent, prompting
the ECB to step in and "aggressively" buy the paper.
The 2- 10- Italian government bond yield curve inverted as
the yield on 2-year government bonds surged above those of their
10-year counterparts to 7.66 percent, indicating the market was
increasingly pricing in the risk of a credit event.
The yield curves of Greece, Portugal and Ireland also
inverted before they were forced to seek bailouts.
Italy's inability to finance itself could become a systemic
risk to the euro zone given the size of its economy, the size of
its bond market and the heavy exposures that German and French
banks have to their bonds.
Lenders are not deemed to have enough to bail it out if it
were ever to default on its debt.
The increase in margin was smaller than the initial 15
percentage points that were applied across the board to
Portuguese and Irish bonds, before they were shut out of
But analysts said today's moves were likely to be the
beginning of a series of margin increases if yields kept rising,
while the massive increase in Italian bond yields would add to
the costs of banks to borrow in commercial markets.
"Italian repo markets have been under pressure for some time
now... If you are holding Italian paper and need to raise cash
the ECB will increasingly look like the best place to go," Chris
Clark, rate strategist at ICAP.
"If you are holding Italian bonds and you want to raise cash
in the repo market, the sell-off in the cash market this morning
is more detrimental to your position than is an additional
increase in the margin."