Money markets repo cost rise to boost spanish banks ecb funding

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* Spanish banks' borrowing from ECB hits record high* LCH. Clearnet raises repo margins, adds to funding squeeze* Italian banks faring better, but still pressuredBy Kirsten DonovanLONDON, Aug 14 An increase in the cost of raising funds using Spanish government bonds as collateral is likely to make the country's banks even more reliant on the ECB for cash, even as such borrowing hit a record high last month. The problems facing Spanish banks -- struggling with losses from a collapse of the real estate sector -- were highlighted by European Central Bank data on Tuesday showing they borrowed 400 billion euros in July, up 10 percent on June.

Shut out of interbank funding markets and with deposits falling steadily this year, there are few funding options left for Spanish banks other than the ECB. Their total borrowing from the ECB is around three times higher than at the start of 2012. Clearing house LCH. Clearnet SA said late on Monday it would raise the extra deposit it requires for trading some Spanish and Italian bonds in the repo (repurchase) market, where the bonds are used as collateral to borrow funds."It's just driving Spanish banks further into the arms of the ECB," said Rabobank rate strategist Lyn Graham-Taylor.

According to ECB data, the outstanding amount of repo transactions through central counterparty clearers such as LCH by Spanish banks was 46.3 billion euros at the end of June, more than 20 billion euros less than at the beginning of the year. LCH. Clearnet raised the margins on trades using Spanish bonds with a maturity of 0.75 - 3.25 years by as much as 1.4 percentage points and upped the cost of using 10-15 year bonds.

It also raised the margin required to use Italian bonds with a maturity of 3.25-7 years. The largest increase was just over half a percentage point."As banks are used to investing mainly in short-duration paper, it is likely the LCH decision will have more impact on Spanish banks than Italian banks," Barclays Capital rate strategist Giuseppe Maraffino said in a note. Italian banks' outstanding repo transactions via central counterparties has risen throughout 2012 to stand at 113 billion euros, the second highest level since mid-2010, demonstrating their greater access to the market."Italian banks are having less problems funding themselves," said Rabobank's Graham-Taylor. "In Italy the problem is the sovereign so the banks have more market access than in Spain where the problem is the banks."Nonetheless, Italian banks' borrowing from the ECB has risen almost 75 billion euros this year.