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By Marius Zaharia
December 16, 2011 5:14 PM EST
Even the safest euro zone banks could start queuing up at the European Central Bank for cash in the next few months as their massive exposure to government debt freezes them out of money markets.
The pressure pushing banks' short-term funding costs higher could escalate quickly if the value of their sovereign debt holdings, which have already fallen sharply, take another hit when euro zone governments begin the tough task of refinancing huge amounts of borrowing early next year.
With no solution to the euro zone debt crisis in sight, interbank market players say they are reducing credit lines to an ever increasing number of banks.
"It is utter madness ... When we see big names paying 300 basis points over overnight rates for dollars you know something is wrong," said the head of money markets at a bank in London, who asked not to be named.
"Credit lines have already been reduced, we are seeing the big names paying through the nose for cash from corporates as wholesale is pretty much dead. The focus now is for the core banks to raise cash through the retail/corporate space. Central banks may be called upon."
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Most banks based in the euro zone's most indebted states are effectively shut out of the money markets and banks in France -- seen as the weakest of the bloc's triple-A-rated core sovereigns -- are already being forced out one by one, traders said. Stress is also exacerbated by end-year liquidity needs.
French banks' borrowing from the ECB topped 100 billion euros in the maintenance period ending November 8, compared to 87 billion euros the month before. French banks are more exposed than any those of any other euro zone country to Italian, Spanish and Greek debt, with holdings in excess of 600 billion euros, according to Bank for International Settlements data.
Nikolaos Panigirtzoglou, European head of global asset allocation and alternative investments at JPMorgan, expects a pickup in Austrian banks' take-up of ECB cash in the coming months if no solution to the crisis is found.
He said funding strains for banks could seep deeper into the core as bond redemptions and interest payments in Italy, which has to pay some 100 billion euros between January and April, draw nearer.
"For now in the expanded periphery we have Belgium and France, but it could go further," Panigirtzoglou said.
Citing "increased challenges" in financial markets, Fitch Ratings downgraded Goldman Sachs, Deutsche Bank and five other large banks based in Europe on Thursday.
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Euro 2012 supply and redemption schedules http://r.reuters.com/gev45s
Country-by-country bank exposure: http://r.reuters.com/vyj98r
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