Bank debt rallied on Thursday after European authorities announced a new deal to tackle the region’s crisis – but the reaction fell short of the dramatic response expected by some market participants.
“The markets have gained massive support here, but there has been no rush to get invested,” said Suki Mann, credit strategist at Société Générale.
Markit’s iTraxx Europe Senior Financials index, tied to the senior debt of 25 of the region’s banks, fell about 40 basis points to 203bps, its lowest since the beginning of August, suggesting investors may be becoming more comfortable with bank debt.
However, a slew of issuance of new bank bonds failed to materialise, with only French lender BPCE upsizing its covered bond programme by €750m. That emphasises a lingering problem for Europe’s banks – lack of access to longer-term senior unsecured funding, the bread and butter of bank financing.
European authorities promised to examine the possibility of guaranteeing bank debt to help deal with the funding issue, potentially reviving a practice that was popular in the years immediately after the financial crisis. “A coordinated approach at EU level is needed” to support bank funding, the European Banking Authority, administrators of the banking stress tests, said in a statement.
Markets have remained largely shut to European banks aiming to issue senior unsecured bonds, with only stronger names able to sell the debt in recent weeks. European banks face a funding hurdle next year, as $186bn worth of government-guaranteed debt comes due, according to figures from Dealogic.
Commentators say the lack of detail on funding support may have muted market reaction, even as Europe’s regulators promised to help lenders recapitalise.
There was “some vague positive statement made on supporting banks’ access to term funding, but again we need to pay attention to the detail,” Credit Suisse analysts wrote in a note to clients.
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