Europe’s banks will compete with their governments to borrow $2 trillion next year as the two groups refinance maturing bonds and bills.
Euro-area governments have to repay more than 1.1 trillion euros ($1.5 trillion) of long- and short-term debt in 2012, with about 519 billion euros of Italian, French and German debt maturing in the first half alone, data compiled by Bloomberg show. European banks have about $665 billion of debt coming due in the first six months, with a further $370 billion by the end of the year, according to Citigroup Inc., based on Dealogic data.
“Serious investors are fleeing from both European sovereign and European bank debt in droves,” said Mark Grant, a managing director at Southwest Securities Inc. in Fort Lauderdale, Florida. “The financials of both classes are in question, and nothing of substance has been achieved to correct the problems and quell the European crisis.”
The 440 basis-point yield premium investors demand to hold bank bonds rather than benchmark government soared to 448 Nov. 30, the most since January 2009, according to Bank of America Merrill Lynch’s EUR Corporates, Banking Index. The average spread between January 2005 and January 2007 -- before the crisis struck -- was 38 basis points, the data show.
Banks and governments are facing funding deadlines as investors push up yield premiums on all but the safest securities to records amid mounting concern the euro may not survive the sovereign-debt crisis that began in Greece two years ago. A breakup of the single currency bloc would spark a wave of defaults among the region’s lenders because of their cross-border connections, and bondholders can no longer rely on governments making good banks’ losses.
Banks need to refinance bonds at an average rate of $230 billion every three months in 2012, assuming they weren’t able to pre-fund those liabilities in the first half of this year, according to Lisa Hintz at Moody’s Corp. in New York. That compares with a $132 billion average for the 11 quarters ended in Sept. 30, she said.
“In unsecured funding, banks are effectively competing with the sovereigns,” said Hintz. “Just looking at a bank’s business model, what kind of profitable loan can an Italian or Spanish bank make when their marginal funding is at a spread to the sovereign and the sovereign is at 7 percent or more?”
Italian 10-year government bond yields closed at more than 7 percent in the five days to Nov. 30. The country was forced to pay 7.89 percent to sell three-year debt at an auction on Nov. 29, compared with 7.56 percent for 10-year notes, a so-called inversion of the yield curve that typically signals investor concern that a default is on the way. A yield of 7 percent was the level that presaged requests for bailouts in Greece, Ireland and Portugal.
Italy has to refinance 320 billion euros of bonds and bills next year, with 113 billion euros coming due in the first quarter alone, Bloomberg data show. The Nov. 29 auction was for a total of 7.5 billion euros.
The market for senior unsecured bonds dried up in July, a victim of Greece’s flirtation with default and planned rules that would force creditors to take losses before taxpayers. Since July, when UniCredit SpA raised 1 billion euros in floating-rate notes due November 2012, only national champions such as Deutsche Bank AG and HSBC Holdings Plc have been able to tap the public professional market.
“It looks as if we’re going to see a bank-funding squeeze,” said Roger Doig, who helps manage the equivalent of about $58 billion in fixed-income assets at Schroders Plc in London. “If anything, bondholders are taking every opportunity to exit positions. Interest in buying new paper is limited.”
Efforts by banks and sovereigns to persuade investors to buy their notes are pushing up costs for other issuers, according to Nicholas Bamber, head of investment-grade corporate bond origination and private placements at Royal Bank of Scotland Group Plc.
“We see all the banks suddenly trying to fund again and the sovereigns trying to fund again,” he said. “There’s going to be a huge amount of supply in the first quarter, and how do people make their bonds attractive?”
There are “early signs” of a credit crunch emerging in the euro area given the difficulties banks have in accessing funding, Bank of England Governor Mervyn King told lawmakers at a Parliamentary committee in London this week.
Banks are also being forced to compete for deposits, which were outstripped by loans to the tune of 22 billion euros in 2007, a gap that “blew out” to 289 billion euros in 2008, according to Oliver Wyman, a consulting unit of New York-based Marsh & McLennan Cos.
Customers are pulling money out of stressed countries’ banks. Greek lenders lost as much as 14 billion euros in the two months to the end of October, George Provopoulos, head of the Greek central bank, told lawmakers in Athens on Nov. 29. At UniCredit, Italy’s biggest lender, customer deposits at the end of September fell 3.5 percent to 392.5 billion euros from the end of June, the Milan-based bank said in its third-quarter statement, citing “the volatility of corporate customer deposits.”
Securitizations, which between 1999 and 2007 grew from “almost nothing” to as much as 30 percent of long-term debt issued by 2006, according to the Oliver Wyman report, aren’t helping as issuers struggle to make the economics work.
Post-crisis, securitizations -- pools of assets that are repackaged into securities of varying levels of risk and used to finance everything from home loans to offices, and water companies to pubs -- “are yet to return in any significant volume,” according to the report. The funding gap will have to be filled either through alternative wholesale markets, increased deposits, or reduced lending.
When markets are volatile, banks find it easier to borrow in their home currencies and swap the proceeds for dollars to fund their U.S. businesses, rather than to borrow directly in dollars. The U.S. Federal Reserve, acting together with five central banks including the ECB, on Nov. 30 was forced to cut the cost and extend the length of emergency dollar funding for European banks after costs rose to three-year highs.
“The fact that central banks saw the need for such measures confirms how serious the bank funding situation is,” said Gary Jenkins, head of fixed income at Evolution Securities Ltd. in London. “It does not alter the underlying problem with European sovereign debt on banks’ balance sheets.”
A measure of banks’ reluctance to lend to one another for three months, the Euribor-OIS spread, has reached a 2 1/2-year high. The difference between the three-month borrowing benchmark and overnight indexed swaps increased to 99.6 basis points yesterday, the widest since March 2009.
Banks, concerned about each others’ credit, also prefer to put their spare cash with the European Central Bank than lend it, depositing 314 billion euros with the Frankfurt-based ECB as of yesterday, the most since June 2010.
“Central banks are supplying liquidity that the banks need,” said James Ferguson, a strategist at Arbuthnot Securities Ltd. in London. “At the same time, the banks are shedding risk assets and buying short-term government debt. So the government is providing liquidity to the banks and the banks are funding the government and so the circle continues.”
That’s at odds with rules instituted by the Basel Committee of supervisors, which require banks to fund long-term assets from long-term funding. If the European banks that fall short all tried to meet that requirement only by issuing long-term debt, banks’ need for additional long-term funding may be as much as 2.7 trillion euros, Oliver Wyman estimates.
“The sovereign-debt crisis is a banking crisis,” said Bill O’Neill, chief investment officer for Europe, Middle East and Africa at Merrill Lynch Wealth Management. “You cannot unweave the two.”