Banks Vie With Nations to Sate $2T Funding Need

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 yield premium investors demand to hold bank bonds rather than benchmark government debt has soared to 448 basis points, 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.
Funding Pace

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?”
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