Moves by US and European governments to guarantee the debt of banks and other financial institutions have made private fundraising in vital parts of the capital markets extremely unattractive.
In spite of governments intervening to shore up banking systems, there are so far few signs that this is improving conditions in the credit markets.
For example, in October there has been no issuance of bonds backed by credit card loans in the US or Europe, according to data from Dealogic. Until recently, activity in this type of asset-backed security had held up reasonably well.
“There is now a relative advantage to raising funds through guaranteed bank paper versus the asset-backed markets,” said Christopher Flanagan, managing director at JPMorgan. “It is very tough to say how long this will remain the case for, as much of it depends on what further action governments take. It could be months or even years.”
The ability of banks and other financial groups to raise money via government guarantees means funding through more traditional routes like asset-backed securities will be much more expensive.
“In the short-term, the government moves will have an effect. There has not been any issuance in credit cards because all the major banks now have another, cheaper option,” said Craig Leonard, head of structured debt syndicate at Barclays Capital.
In addition to offering banks cheaper sources of funding, the explicit government guarantees on many bank securities has led to a sell-off in bonds issued by mortgage financiers like Fannie Mae and Freddie Mac, as well as asset-backed securities. As a result, the cost of borrowing in asset-backed markets has soared, with the premiums over US government bonds at record highs. This makes private sector funding even less attractive.
Some analysts say the government funds are being used by banks to buy rivals, rather than provide new lending. On Friday, PNC Financial became the first bank to make use of the US government’s bank recapitalisation programme to merge with a weaker rival.
Mr Leonard said he expected the asset-backed market would eventually again be needed by banks because of the scale of financing required. “In the longer term, we expect the credit card market to be active again because it’s clear the government programmes are not large enough to cover all the banks’ funding needs.”
