Sometimes, symbolism is what counts. Barclays is the first UK bank to test the market’s appetite for the government’s guarantee of bank debt. The UK banking fraternity could not allow this to be a damp squib. A lot is riding on the the knock-on effects this guarantee will, it is hoped, provide – less hysteria in money markets and more confidence in banks’ ability to procure term funding.
So British banks should be relieved to see Barclays’ €3bn three-year bond deal get away. There are few ways institutional investors can get their hands on debt both guaranteed by the UK government and denominated in euros, which helped demand. Barclays also gathered a cast of thousands (well, five other banks) to make a market in the bonds, thereby ensuring their liquidity. For Barclays, the debt works out cheaper than if it had gone it alone, assuming it could have issued unguaranteed bonds of that maturity anyway. True, Lloyds TSB did a bond issue last week without guarantee. But it was smaller and the maturity longer, both important in current markets that unusually ascribe more credit risk to banks near-term than further out.
Is there a risk banks will become reliant on government-guaranteed (also called agency) debt? The question may seem a bit of a luxury, given that only 10 days ago banks could not get more than overnight funding. The issue could resolve itself anyway as rising agency issuance will cause spreads to widen, making it a less cost-effective option for banks.
In any case, the £250bn in government guarantees is not that big a number compared with the vast money markets and retail deposits. The point of the guarantee is not to substitute for such regular sources of bank funding but rather to provide a breather until normal service resumes. Still, as symbols go, this one is a pretty powerful one.
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