Issuing Debt Boosts EU
Debt issuance boost for European economy
Europe’s development banks and public sector groups responsible for offering loans to small businesses and local authorities have enjoyed record debt issuance this year in a boost to the region’s struggling economy.
Debt sales of these groups have soared to $360bn so far this year, a 9 per cent increase on the same period in 2011, and the highest year-to-date total on record, says Dealogic, the data provider. The amount of debt raised this year is also more than double that of 2006 – before the financial crisis.
The jump in issuance, sparked by the emergency financial injections of the European Central Bank, may prove critical to the eurozone economy as it should help small business finance projects that could prove pivotal to a revival in a region still suffering from the public debt crisis.
Jean-Marc Mercier, global head of debt syndicate at HSBC, said: “These markets have been helped by the positive effects of the ECB’s loans. But they are also benefiting from the fact the Greek debt exchange is now behind us and the reform process in Italy and Spain.”
Although there were signs last week that sentiment may be turning for the worse in the eurozone with a disappointing Spanish bond auction on Wednesday, bankers and investors remain hopeful that ECB loans of more than €1tn to eurozone financial institutions in two three-year tenders are paving the way for recovery.
Commercial banks, which have been the main beneficiaries from emergency ECB loans, have been big buyers of the debt of public sector groups, such as the European Investment Bank, in effect the European Union’s bank, and KfW, the German development bank.
This has helped the EIB and KfW borrow at lower rates, which they can then pass on to small businesses and other groups. EIB benchmark five-year bond yields, which have an inverse relationship with prices, have fallen more than 1 percentage point to 1.92 per cent since the end of November.
However, some bankers warn that the positive afterglow from the ECB’s emergency action may be dimming as Spanish and Italian benchmark 10-year bond yields jumped sharply last week amid scepticism that these two countries can meet important fiscal targets and trigger growth in their sluggish economies.