European Banks Unable to Sell Bonds

It’s been 2 1/2 months since a bank managed to sell a conventional bond in Europe’s public markets, the longest period without a deal ever and another example of the sovereign crisis choking off funding.
UniCredit was the last non state owned bank to issue senior, unsecured benchmark notes in Europe with a $1.4 billion sale on July 13, according to data compiled by Bloomberg. That compares with deals worth 41.9 billion euros in the third quarter of last year. Banks are the biggest buyers of other lenders’ bonds as well as debt sold by euro-region nations, and are being hurt by Greece’s flirtation with default and proposed laws that would force their creditors to take losses before taxpayers. That’s pushed the cost of selling bonds to within 3 bps of the record reached in the aftermath of Lehman’s failure three years ago. The extra yield investors demand to hold banks’ senior bonds instead of benchmark government debt has soared to 322 basis points, from 202 at the end of July, according to Barclays Capital’s Euro Aggregate Banking Senior Index. The gauge reached an all-time high 325 basis points on December 30, 2008.
“It’s nothing short of a disaster,” said Suki Mann, a strategist at Societe Generale in London. “Add a new issue-premium to current spreads and funding becomes prohibitive.” Sentiment toward European banks has been hurt by a mix of downgrades, losses and concern about the global economy. Speculation Spain and Italy will be forced to follow Greece, Ireland and Portugal in seeking international bailouts has roiled markets over the past two months.
The Greek government is struggling to persuade the EU, ECB and IMF that it can meet the debt-reduction requirements needed for the next instalment of its rescue package to be released. S&P cut ratings on Italian banks including UniCredit on Wednesday after the government’s credit was downgraded for the first time in five years this week.