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Funding Freeze in Europe

For the first time, European lenders have collectively been unable to replace their maturing debt with new bonds for at least the past five years – a funding shortfall of $241bn or 36.85%!  Next year, 2012, banks will face an even greater ‘redemption’ hump with $720bn of debt due to mature.

According to date compiled for the Financial Times by Dealogic, European banks have sold $413bn worth of bonds this year, equivalent to 63.15% of the $654bn that is due to be returned to investors in 2011 as the debts mature.

Investors say they have been deterred from buying bank bonds because of uncertainty over the financial health of some banks, the fate of the eurozone and the impact of new financial regulation. The funding freeze has raised fears about the knock-on effects for companies reliant on bank funding and the broader economy.

Morgan Stanley estimates that banks will have to dispose of as much as $3,300bn worth of assets over the next few years to meet new regulations on the amount of capital buffers they hold and to address the funding shortfall.  The banks’ funding difficulties and shrinking balance sheets are being monitored with mounting concern by the European Central Bank, which is considering a number of new supportive measures. It is worried about the implications for financial stability and the risk of a lending squeeze driving the eurozone deeper into recession.

The Dealogic bank data includes so-called senior unsecured issuance, traditionally the bread and butter of bank funding. It excludes covered bonds, the bundled packages of loans and mortgages that have become increasingly popular for banks to issue.

Including such debt, European banks sold $744bn worth of bonds this year, compared with $888bn worth of maturing debt, still leaving a $144bn shortfall.

Reference:  Financial Time, Tracy Alloway, 2011-11-27, “Europe’s banks feel funding freeze”