EU bank debt plan may struggle to thaw fund market frozen by crisis

Written by Bloomberg | Updated: Oct 29 2011, 03:26am hrs
European banks, which need to refinance more than $1 trillion of debt next year, may struggle to fund themselves until policy makers follow through on a pledge to guarantee their bond sales.

European Union leaders promised this week to urgently look at ways to guarantee bank debt in a bid to thaw funding markets frozen by the sovereign debt crisis. Lenders have found it hard to sell bonds for the past two years and have increasingly turned to the European Central Bank for unlimited short-term emergency financing.

The biggest problem at the moment is that banks havent been able to fund themselves, said David Moss, who helps manage about 8.5 billion euros ($12 billion) at F&C Asset Management in London. If banks cant fund themselves, theyll struggle to exist.

In 2008, the US Federal Deposit Insurance gave a guarantee on bank bonds, allowing financial institutions to access markets with the backing of the government. For European policy makers to replicate the success of that program any warranty would have to be given at the EU level because the deteriorating public finances of southern states means they would struggle to back their banks, analysts said.

Its a valiant attempt to get term funding kick-started again, said Andrew Stimpson, an analyst at Keefe Bruyette & Woods in London. But investors concerns are with the sovereigns not the banks, so putting the onus on the sovereigns to guarantee bank issuance does not sound convincing.

Concern that banks will have to write down their holdings of peripheral sovereign debt has sent bank stocks down 24% this year, according to the Bloomberg Europe Banks and Financial Services Index.

Bank stocks rallied the most since May 2010 on Thursday after EU leaders agreed to bolster lenders capital, boost the size of the regions rescue fund and persuaded bondholders to accept a 50% loss on their holdings of Greek debt.

A co-ordinated approach at the EU level is needed to support banks access to the funding markets, the European Banking Authority said in a statement.

The EBA has been asked to work with the EU Commission, the ECB and European Investment Bank to urgently explore options for achieving this objective, said the group, which oversees the work of regulators in Europe. The European Investment Bank provides loans, technical support, venture capital and guarantees for senior and subordinated debt on behalf of the EU, according to its website. The bank is funded by member states, including those outside the single currency.

Under plans being considered by policy makers, Europe would only co-ordinate the guarantees rather than provide them, according to a person with knowledge of the matter. The proposal would also be unlikely to require approval by all member states, said the person, who declined to be identified because the talks are private.

European banks were unable to sell senior unsecured bonds for more than two months this summer, the longest period on record without an offering. Deutsche Bank ended the drought on September 29 with a 1.5-billion-euro offering.

Banks that have been unable to tap the bond markets are likely to become more reliant on the ECB for funding. When the central bank revived a tool last used at the end of 2009 to ease money-market tensions on October 26, 181 banks borrowed a total of 56.9 billion euros for 12 months.

Insurers in EU likely to shift bond losses to life-insurance policies

Oct 28: European insurers, which hold about 8% of southern euro-zone sovereign debt, may survive writedowns without raising capital by passing losses onto customers. Life insurance policyholders will shoulder about two-thirds of the potential losses insurers face on their 235 billion euros ($335 billion) of Greek, Italian, Irish, Portuguese and Spanish debt, according to analysts at JPMorgan Chase & Co. Most government bonds held by insurers back so-called with- profits life policies in which the customers and sellers share any gains or losses on their investments.