LONDON: Italy and Portugal, the focus of recent concern about the health of Europe's financial sector, saw their borrowing costs fall faster than the costs for their euro zone peers on Monday after the ECB said it would aim to protect banks from further policy easing.
One of the European Central Bank's top policymakers, Vitor Constancio, said on Friday that more economic stimulus, which markets anticipate next month, could be delivered in a way that mitigates "the immediate, direct impact on the cost on banks".
With the ECB expected to cut its bank deposit rate deeper into negative territory at its meeting on March 10, analysts read his statement as an endorsement of a tiered rate policy similar to that adopted by Japan in late January.
Negative interest rates are effectively a tax on banks designed to encourage them to lend, but worries about the strain on bank balance sheets have raised questions as to whether sub-zero rates are now part of the problem rather than the solution.
"Suggestions by the ECB that there is some way of mitigating the impact of negative interest rates would be a positive for weaker banking sectors in Italy and Portugal," said Owen Callan, a senior analyst at Cantor Fitzgerald.
Lisbon and Rome have been at the forefront of the latest scares about euro zone banks, which have spilled over into government borrowing costs, an echo of Europe's debt crisis .
At the end of last year, the Portuguese central bank transferred nearly 2 billion euros ($2.18 billion) of Novo Banco bonds to "bad bank" Banco Espirito Santo, making them nearly worthless.
Investors have teamed up to challenge the decision.
In Italy, the government has launched a scheme to help its domestic banks shed some 200 billion euros non-performing loans.
Italian 10-year bond yields fell 5 basis points to 1.53 percent, while Portuguese 10-year bond yields fell 1 basis point to 3.36 percent.
Portuguese yields are down about 100 basis points from a peak hit earlier this month.
Germany's 10-year Bund yield was down 2 bps at 0.18 percent.
European Union bank shares, which have shed a fifth of their value this year, led a rally across euro zone stocks. "We have had a rare acknowledgement from the ECB that the cost on banks needs to be mitigated," Societe Generale strategist Ciaran O'Hagan said.
IRISH WORRIES
However, Irish bond yields rose on concern that a national election on Friday could produce an inconclusive result and also on an increased risk that Britain, one of its biggest trading partners, will leave the EU.
Support for Irish Prime Minister Enda Kenny's Fine Gael party held steady in an opinion poll on Monday, but his coalition government remained some way short of the support needed to stay in office.
Further ahead, Britain announced it will hold a vote on its continued EU membership in June, with the exit campaign energised by the backing of London Mayor Boris Johnson.
A report commissioned by the Irish government estimated that any new barriers or tariffs in the event of Brexit could see trade between the two countries fall by at least 20 percent.
Comments
Comments are closed for this article.