Bloomberg News

EU Said to Shield Banks Getting Guarantees in Debt-Roiled States

November 29, 2011

(For more on the region’s debt crisis EXT4.)

Nov. 26 (Bloomberg) -- Banks in states roiled by Europe’s sovereign-debt crisis may be partly shielded from extra costs when they seek government guarantees, according to two people familiar with the situation.

The European Commission will publish rules on state aid for lenders that may dilute the effect of turmoil in the euro area on the fees that banks have to pay for guarantees on their loans and bonds, said the people who couldn’t be identified because the discussions aren’t public. Under the plans, the formula for setting the fees would reduce the impact of soaring debt- insurance costs for the country giving the backstops, one of the people said.

“Renewed tensions” in financial markets are forcing European Union regulators to extend into 2012 special state aid rules for banks that have allowed governments to inject billions of euros into the industry, said EU Competition Commissioner Joaquin Almunia this month. He said he was planning to “clarify and update the rules on pricing and other conditions.”

The cost of insuring against default on European sovereign and financial company debt rose to records as the euro-region’s crisis deepened with Italy paying the highest yields to sell short-dated bills in 14 years. The Markit iTraxx Financial Index on senior debt of 25 banks and insurers increased to 354 and the subordinated gauge gained six basis points to 601, according to JPMorgan Chase & Co. An increase signals worsening perceptions of credit quality.

Shrunk Balance Sheets

EU governments spent 757 billion euros ($1 trillion) in state guarantees for banks from October 2008 until December 2010. EU regulators have ordered banks that received bailouts to shrink their balance sheets and change their business models.

Under current rules, a bank that gets a state guarantee pays a fee to the government according to a pricing formula partly based on the lender’s credit-default swaps between January 2007 and August 2008.

The revised measures, to be published on Nov. 30, will adjust the price of the guarantee and use a three-year period for the lender’s credit-default swaps to mitigate the effects of higher prices of the contracts, the people said.

A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

--Editors: Peter Chapman, Dan Kraut

To contact the reporter on this story: Aoife White in Brussels at awhite62@bloomberg.net. Esteban Duarte in Madrid at eduarterubia@bloomberg.net;

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net; Paul Armstrong at Parmstrong10@bloomberg.net;


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