EU Bank Debt Plan May Struggle to Thaw Funding Market

European banks, which need to refinance more than $1 trillion of debt next year, may struggle to fund themselves until policy makers follow through on a pledge to guarantee their bond sales.

European Union leaders promised this week to “urgently” look at ways to guarantee bank debt in a bid to thaw funding markets frozen by the sovereign debt crisis. Lenders have found it hard to sell bonds for the past two years and have increasingly turned to the European Central Bank for unlimited short-term emergency financing.

“The biggest problem at the moment is that banks haven’t been able to fund themselves,” said David Moss, who helps manage about 8.5 billion euros ($12 billion) at F&C Asset Management Plc in London. “If banks can’t fund themselves, they’ll struggle to exist.”

In 2008, the U.S. Federal Deposit Insurance Corp. gave a guarantee on bank bonds, allowing financial institutions to access markets with the backing of the government. For European policy makers to replicate the success of that program any warranty would have to be given at the EU level because the deteriorating public finances of southern states means they would struggle to back their banks, analysts said.
‘Valiant Attempt’

“It’s a valiant attempt to get term funding kick-started again,” said Andrew Stimpson, an analyst at Keefe Bruyette & Woods Inc. in London. “But investors’ concerns are with the sovereigns not the banks, so putting the onus on the sovereigns to guarantee bank issuance does not sound convincing.”

http://www.bloomberg.com/news/2011-...plan-may-struggle-to-thaw-funding-market.html