Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.
Rani Molla is a Bloomberg Gadfly columnist using data visualizations to cover corporations and markets. She previously worked for the Wall Street Journal.
European banks have a lot of debt coming due, and Mario Draghi wants skittish credit traders to know he has the firms' backs.
The European Central Bank president announced a longer-term lending program for the region's banks on Thursday as one prong of a wide-ranging expansion of stimulus in the region. The idea is to make it cheaper for banks to lend to companies and also help the banks easily pay down debt maturing in the next four years without having to rely on increasingly fickle bond investors.
"This comes at a time when the pricing of bank debt is volatile and uncertain," Draghi said at a press conference after the announcement of the additional stimulus measures. The new lending program, which starts in June, provides European banks with financing "at an attractive price at a time of upcoming bank bond redemptions," he said.
Just how much debt do banks incorporated in Europe have coming due? A whopping $2.3 trillion of it maturing through the end of 2017, according to data compiled by Bloomberg.
That's a lot of money to refinance, especially when borrowing costs for European banks have been rising. Investors are demanding about 1.54 percentage points over benchmark rates to hold the firms' debt on average, up from less than a percentage point a year ago. In some cases, the rates for banks to borrow are substantially higher than that.
Earlier this year, credit investors worked themselves into a tizzy over European banks, particularly whether they'd be able to pay coupons on their contingent capital securities that are kind of like debt, kind of like stocks, and possibly riskier than both. Such securities of banks including Deutsche Bank, Credit Suisse and Standard Chartered plunged, spurring an even broader selloff among the firms' stocks and bonds. At the heart of the issue was concerns over souring energy and emerging-markets loans, paired with lower revenues coming from once-lucrative businesses such as debt trading.
Enter generous Uncle Mario, who seems set on preventing another mini-tantrum that could make it tougher for these firms to access capital markets. He's determined to make it easier for almost everyone and anyone in Europe to borrow money at low costs and use it to support the region's growth. Banks are crucial to that whole plan -- they need to survive and thrive and keep throwing money out to the masses at decent interest rates.
In the long term, this whole plan could end up weakening the banks' creditworthiness should they loosen their lending standards as they put money to work. But in the short run, Draghi will make sure they can pay back their debt. And indeed, credit traders responded right after his announcement on Thursday by substantially lowering the cost to insure against losses on senior financial debt for five years.
The ECB also clearly wants to counter any detrimental effects of negative-rate policies on bank profitability. While the central bank says that the incredibly low rates aren't on average hampering bank balance sheets just yet, the lending program provides a subsidy just in case.
So credit traders will start liking European banks again. After all, Uncle Mario is a powerful guy, and he's committed himself -- and more important his wallet -- to propping up the region's banks.
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