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Blue Chip Companies Bailing Out Weak Eurozone Banks

Role reversal Euro-style.  With 2% yields in the cash markets, this makes sense intuitively for cash-rich lenders, but with the possibility of default looming large, the loans are now secured.



Blue-chip names like Johnson & Johnson, Pfizer and Peugeot are among firms bailing out Europe's ailing banks in a reversal of the established roles of clients and lenders.

One source with knowledge of the so-called repo deals or short-term secured lending, said the two U.S. pharmaceutical groups and French carmaker were the latest to sign up for them.

Europe's banks are struggling to secure the cash to fund their day-to-day business and have largely stopped lending to each other for fear Europe's sovereign debt crisis could land any of their peers in trouble.

As a result a group of well-known, cash-rich companies with solid cash flows has stepped in the repo market, which provides a form of lending so far almost exclusively in use between banks, and between banks and central banks.

One market participant said in one key area of lending companies now accounted for 25 percent of these deals.

Repos provide the new financiers with the strict guarantees they need before parting with their cash, answering worries that the crisis has weakened Europe's banks to the extent that they might not be able to pay the money back.

"Companies in the past were ... happy to deposit cash on an unsecured basis to a bank for an interest payment," said Frank Reiss, who oversees some of the repo business at Euroclear, the Brussels-based settlement house owned by a group of banks.

"Now following the crisis, we have seen that companies are engaging in repos secured with collateral against the cash they are lending," said Reiss. Euroclear is the largest administrator of repo trades in Europe.

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Reader Comments (3)

NEW YORK (MarketWatch) — European Central Bank President Mario Draghi on Monday described the continent’s economic condition as “grave,” but said euro-area nations are taking steps to combat the debt crisis.

Jan 16, 2012 at 11:41 PM | Registered CommenterDailyBail
This is a victory for capitalism and the way it should be. As long as no one gets bailed out by the government, I am happy
Jan 17, 2012 at 3:34 PM | Unregistered CommenterWyrdles

I agree. But what's interesting about this story is that private funding has grown to 25%, and that these companies providing the financing are requiring collateral for the loans, when in the past they did not. It shows they do not trust that the banks will be able to pay back the loans.
Jan 17, 2012 at 4:24 PM | Registered CommenterDailyBail

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