High-Yield Debt Of European Banks Becomes Investment Of Choice, Giving Banks Needed Liquidity To Bolster Reserves And Inadvertently Strengthening Bank Balance Sheets

Friday, November 16, 2012 07:40
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High-Yield Debt Of European Banks Becomes Investment Of Choice, Giving Banks Needed Liquidity To Bolster Reserves And Inadvertently Strengthening Bank Balance Sheets

Tags: banks | bonds | world economy

The bonds of troubled banks are usually considered a pariah…until banks are deemed to have hit bottom and the bonds begin to look like bargains. Money managers are applying that assessment to European banks, even as Europe goes into recession for the second time in four years.

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The Bank of Ireland on Tuesday, November 13, 2012 sold $1.3 billion worth of bonds after receiving a bailout in 2010. The offering was the largest without a government guarantee in almost three years.
 
The success of the offering signals that the capital markets are thawing out in Europe. The bonds still carry high risk for investors with the state of Europe’s economy.
 
Profits at European banks are flagging. The biggest driver of demand for the bonds has been the European Central Bank’s (ECB) commitment to buy Eurozone countries’ bonds in an effort to keep credit costs low for distressed member country economies.
 
Since interest rates are at record lows, the high yield debt of European banks is particularly appealing.
 
Still, the capital markets have been discerning and the highest quality banks have been able to sell the largest lots at reasonable rates.
 
The renewed interest from investors at all levels is making it easy for European banks to raise money and fortify their reserves to buffer losses.
 
Although investors are taking a significant gamble, the bond sales could better effect what the ECB is trying to do in bolstering banks’ coffers during a time of distress.
 
This might actually make the recession much more shallow and put Europe’s banks back on the road to recovery sooner, helping to alleviate the sovereign debt crisis in the process.
 

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