The ECB Cuts An Abuse Avenue

 |  Includes: EWI, EWP, IRE, SAN, SPY
by: Paulo Santos

Tuesday, the ECB issued a decision that was intended to close a loophole. The loophole consisted in a scheme where banks could finance themselves without having an impact on the state accounts, and also without requiring the shareholders or bondholders to make any effort. Basically, the banks could issue debt, have it be guaranteed by the state, and then financed by the ECB.

Not any longer. The ECB decided that such financing won't be accepted in excess of the amounts already existing, except under special circumstances and on a case-by-case approval process.

What does this mean?

It means that the scheme that had no impact on National accounts or the markets (debt or equity) is gone. So now banks either have to ask for financing from the markets (which means, they issue debt or equity and get cash in return), or they ask for financing from the state (which can come in the form of cash or government debt). Any of the new alternatives has an impact. If the state provides cash or government debt in exchange for debt or equity, then the state recognizes an increased debt load - which it didn't, when issuing guarantees. If the bank turns to the markets then its equity or debt can be hit (if it's even possible to access the markets, that is).


Either way, this development is negative for the banks involved, namely those within the euro periphery, such as Banco Santander (NYSE:SAN), The Bank of Ireland (NYSE:IRE) and other locally-quoted bank stocks.

This development is also negative for the periphery markets, such as Spain (NYSEARCA:EWP), Italy (NYSEARCA:EWI), Ireland, Portugal and Greece.

Finally, in as much as this contributes to a re-flaring of the periphery fears, it can also be broadly negative for the U.S. equity markets, for which a good proxy would be the SPDR S&P 500 (NYSEARCA:SPY).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.