Maltese banks play it safe in euro crisis
European banks fear ratings cut
Banks in Malta are safeguarding their liquidity by depositing surplus cash with the European Central Bank, against no interest, rather than going for a profit with international financial institutions.
Sources close to the ECB said deposits by Maltese banks increased substantially over the past months.
“There is no doubt that, in view of the evolving euro crisis, Maltese banks are being much more cautious with their deposits,” they said.
“Over the past months, deposits by Maltese banks with the ECB increased substantially and are continuing to grow steadily.”
Officials from Bank of Valletta and HSBC – the island’s two leading banks – confirmed they were diverting most of their extra money to the ECB.
The decision to minimise risks on deposits follows a recent pattern set by other European banks.
Those in countries with extra liquidity – particularly Germany, Luxembourg, France and Austria, where the economy is still growing – are also opting to store money in the ECB’s “safe haven”.
The ECB sources said the fact Maltese banks were producing extra liquidity was a good sign.
“Only countries with sound economic activity have extra liquidity at their banks,” the sources noted.
“Countries in a real recession normally won’t have enough cash to sustain their local activities. This will lead to a deeper recession.”
Malta technically fell into a recession in the first quarter of this year. However, various economic indicators, particularly low unemployment, increase in job generation and higher imports and exports, are positive counterweights.
At a recent meeting of its board of governors, the ECB took the unprecedented decision to slash the inter-banking interest rate to zero per cent, meaning that depositors, normally banking institutions, earn no interest rate on their deposits.
The decision was taken to push banks with extra liquidity, such as Malta’s, to lend money to other commercial banks and make more profit.
Unwilling to take risks, banks have stopped lending to other banks, clogging the system and aggravating the euro crisis, particularly in countries where banks are already overexposed to non-performing debt.
Recent developments in the euro area do not point towards a rapid solution.
Moody’s – one of the world’s leading credit rating agencies – warned Germany, The Netherlands and Luxembourg, three of the strongest members of the eurozone, that they might lose their triple-A rating due to rising uncertainty.
According to Moody’s, risks that Greece could quit the eurozone and an “increased likelihood” that Spain and Italy would need more financial assistance weighs down on the three top-rated countries, as Germany is the main contributor to the EU’s bailout fund.
Moody’s kept a triple-A rating for France and Austria but warned this could change by the end of September. Both countries were downgraded earlier this year by Standard & Poor’s.
The president of the eurogroup, Luxembourg Prime Minister Jean Claude Juncker, said he took note of Moody’s rating decision, “which confirms the very strong rating enjoyed by a number of euro area member states”.
“Against this background, we reiterate our strong commitment to ensure the stability of the euro area as a whole,” he said.
His words were strongly bolstered by ECB president Mario Draghi who said last week that the euro was “irreversible” and promised action to reduce countries’ borrowing costs if they were prepared to put in place tough deficit-reduction measures
Financial analysts have taken this as a sign that Europe is at last getting to grips with its problems.