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Opinion

Europe: Banks need to bite funding bullet

Europe’s financial institutions must realize that the price of issuance is unlikely to improve any time soon.

While the stress tests have given investors greater clarity about European bank balance sheets, enabling them to tick that very important solvency box, the desire of Europe’s banks to come to the market with large benchmark debt issues still remains somewhat circumspect.

There’s a pure and simple reason for that. Funding costs in the bond markets remain high, relative to where they were in the first quarter, when a typical AA-rated bank could issue a benchmark five-year deal at 80 basis points over Libor. The sovereign crisis prompted that yield premium to almost double in some cases, and as a result many issuers have continued to sit on the sidelines.

They shouldn’t wait any longer. The harsh realization for European banks is that higher funding costs are here to stay, says Martin Egan, BNP Paribas’ global head of primary markets and origination. Indeed, now might be a good time to come to the market, given the recent rally in spreads on the back of successful sovereign issuance from some of the region’s peripheral sovereigns, such as Spain. That has led credit default swap spreads to rally on average 25bp to 30bp since the beginning of July.

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