Banks Shouldn't Buy Government Bonds With Extra Cash: UniCredit

Banks should not use the extra liquidity provided by European Central Bank funding and other measures aimed at lowering their borrowing costs to buy government bonds, the chief executive of Italian bank Unicredit said on Wednesday.

His comments contradict a statement by French President Nicolas Sarkozy, who said at last week's EU summit that the ECB's increased liquidity provisions for lenders meant countries like Italy and Spain could look to their banks to buy their sovereign debt.

"It wouldn't be logical, in this moment it is everybody's interest to focus on the real economy if there is liquidity. All the rest is superfluous," Federico Ghizzoni told reporters on the sidelines of a banking conference.

Italian banks have increased their reliance on cheaper funding by the ECB, and Ghizzoni in November urged the central bank to increase access to borrowing for the country's lenders, highlighting worries over rising funding costs due to the spreading debt crisis.

UniCredit, which holds around 40 billion euros of Italian government bonds, faces a 7.97 billion euro capital shortfall to meet tougher European requirements to shore up lenders — the second-biggest shortfall in Europe after Spain's Santander.

The European Banking Authority required banks to mark to market their sovereign bond holdings, leading to big writedowns for banks which had stocked up on Italian government debt.

UniCredit

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[CRI-DE  Loading...      ()   ], Italy's biggest bank by assets, has already announced a 7.5 billion euro rights issue to be launched in the first quarter of 2012, 6,150 job cuts and a retreat from key business operations to repair its balance sheet.

In a bid to help banks borrow at cheaper rates, the ECB said last week it would offer ultra-long 3-year financing to lenders and ease rules on collateral it requires for them to tap its funds.

It also cut its interest rates to a record low of 1 percent, prompting some commentators to say banks could borrow cheaply from the ECB and use the liquidity to buy government bonds in euro zone countries whose yields have risen to near-unsustainable levels, pocketing the difference.

But most analysts said that idea looked overly optimistic as banks are being asked to deleverage and recapitalize, and will not be keen to buy more government bonds of crisis-hit countries.

Italy had to pay a euro lifetime record high yield of 6.47 percent on Thursday to sell five-year paper in the first long-term auction since last week's summit.

On top of the ECB liquidity measures, Italy's new government plans to offer banks state guarantees for the bonds they are issuing, in a move aimed at lowering their funding costs.

The measure is part of an emergency package meant to pull Italy back from the brink of financial disaster that is being debated by parliament.