EUROPE is in the midst of a severe credit crunch that has seen the market for bank debt disappear as the continent’s money supply shrinks.
The conditions are so tough they have sparked a row between the region’s most senior regulators over how to shore up Europe’s crumbling banking system as politicians fall further and further behind the curve.
As they wait for clarity from the region’s leaders, banks and investors are simply sitting on cash.
Following recent data that showed a decline in Eurozone money supply, figures out yesterday proved banks are hoarding cash at the European Central Bank (ECB). Overnight deposits hit €346bn (£291bn) – the highest level since the period after Greece’s 2010 bailout.
Lenders have seen funding lines dry up: data provided by Dealogic shows that the market for bank paper is in deep freeze. The volume of unsecured debt sales for the second half of this year is down more than fourfold versus the €232.9bn sold in the first half.
Even sales of covered bonds, the most secure kind of debt, have plunged, from €177.4bn in the first half to €64.5bn in the second.
And banks have to pay more to issue: the three-month London interbank offered rate (Libor), a vital cost benchmark, has risen by more than a third to over one per cent this year.
Crucially, banks’ efforts to resolve their liquidity crisis are being hampered by regulatory delays.
“Every issuer is yapping in our ears about bail-in,” said one senior debt capital markets banker, referring to new “bail-in” rules that will impose losses on debtholders of collapsed banks.
“The final rules keep being delayed and there’s a lot of lobbying to make sure it’s a level playing field.”
But as costs rise, the European Banking Authority (EBA) has become embroiled in a furious argument over its demand that Europe’s banks raise €114bn more in capital. Its board of supervisors is deeply divided over the EBA’s methodology, with German and Italian representatives refusing to support the latest round of stress tests.
They were outvoted by other board members, including the UK, which resulted in significant upwards revision of the capital their banks need.
Bank executives are incandescent. At a closed meeting of lobbyists in Brussels on Friday, one source who was present described the German representative as being “in a rage”. The head of the Italian bank industry body has threatened to sue the EBA.
Expectations are now running high that Commerzbank, Berlin’s second biggest lender, will need a second bailout by Christmas. Other banks are awaiting a rush to issue in January. But even their ability to sell secured debt could be hampered. “There’s a limit with covered bonds... given the asset encumbrance risk if you issue too many of them,” says Bank of America Merrill Lynch’s Marc Tempelman.
Rothschild’s Christian Savvides, who works in debt advisory, said: “What we’re seeing is certainly a credit crunch. The question is to what degree the contraction in bank credit is permanent.”