Bloomberg News

EU Authority Said to Urge EFSF-Backed Bank Bonds to Spur Lending

October 26, 2011

Oct. 26 (Bloomberg) -- Europe’s top banking regulator has urged governments to ease a bond drought by allowing the European Financial Stability Facility to guarantee debt issued by lenders, according to a person close to the situation.

The European Banking Authority proposed that the state bailout fund guarantee banks’ secured and unsecured debt issuance on condition the lenders put the money to work in the interbank lending market, said the person, who didn’t want to be identified because the discussions are ongoing.

Banks in Europe have to refinance 655 billion euros ($906 billion) of senior bonds next year and may need government backing if the debt crisis continues to block access to markets, according to a CreditSights Inc. report released yesterday. European Union leaders are meeting today to agree on measures to stem a sovereign-debt crisis that threatens to undermine financial stability in the 27-member region.

“Everybody agrees we need a coordinated scheme to recapitalize the banks and improve their funding,” European Union President Herman Van Rompuy said on Oct. 23.

Western European lenders raised about 80 billion euros from selling senior unsecured debt this year, according to data compiled by Bloomberg. That’s down from 97 billion euros for the same period in 2010, as investors are concerned that banks, the biggest holders of sovereign debt, will face losses as the crisis escalates.

Deutsche Bank AG reopened the market for senior unsecured debt on Sept. 29, after more than two months without a single benchmark sale in euros, the longest period on record without a deal.

The extra yield investors demand to hold banks’ senior bonds instead of benchmark government debt soared to a record 360 basis points on Oct. 4, according to Barclays Capital’s Euro Aggregate Banking Senior Index.

The measure reached a previous peak of 325 basis points in the aftermath of Lehman Brothers Holdings Inc.’s failure in 2008.

--With assistance from Ben Martin in London. Editors: Peter Chapman, Christopher Scinta

To contact the reporter on this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net

To contact the editor responsible for this story: Christopher Scinta at cscinta@bloomberg.net


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