Jan. 11 (Bloomberg) -- The European Union’s proposal that
senior note holders share the burden of future government
bailouts is driving the cost of insuring the debt of rescued
lenders to record highs.
Credit-default swaps protecting bonds sold by Commerzbank
AG, which has received 18.2 billion euros ($24 billion) from the
German government, almost doubled this year, while contracts on
Italy’s Banca Monte dei Paschi di Siena SpA jumped 35 percent,
according to CMA. Relative yields on European bank and company
bonds are the widest on record compared with spreads in the
U.S., Bank of America Merrill Lynch index data show.
The European Commission, the executive arm of the Brussels-
based EU, proposed last week that holders of senior bonds issued
by failing banks may be forced to take losses to protect public
finances. That’s weighing on the debt, which lenders and
governments have traditionally kept as sacrosanct for fear of
losing access to funding.
“Everyone is going into safe havens and avoiding weak
names due to senior restructuring discussions,” said Alexander
Plenk, an analyst at UniCredit SpA in Munich. “If you’re strong
and don’t need taxpayer money, there’ll be no burden-sharing
because there’s no burden to share.”
The Markit iTraxx Financial Index of 25 European banks and
insurers is at the highest on record relative to the cost to
protect U.S. bank debt. The average credit-default swap on the
six biggest U.S. banks is 71 basis points below their European
counterparts, compared with 341 basis points higher at the
height of the credit crisis in October 2008.
Burden-Sharing Plan
The EU published its burden-sharing proposal on Jan. 6 as
part of draft rules that would also give regulators the power to
transfer assets and liabilities, and replace management of
lenders judged too big to fail.
The plan would “break the link” between senior
bondholders and depositors, previously on the same level in
terms of getting paid back in a crisis, said Roger Doig, an
analyst at Schroders Plc in London, the U.K.’s biggest traded-
fund manager. “That means a greater loss for bondholders in a
default or restructuring,” he said.
Senior bonds are being hurt on speculation funding costs
will rise when the rules are adopted, which would be after a
consultation period ending March 3, followed by approval from
governments and lawmakers in the European Parliament.
Investors demand an extra 164 basis points in yield to own
European senior bank debt instead of German bunds, compared with
144 basis points for non-financial corporate securities, Bank of
America Merrill Lynch index data show. The 20 basis-point gap
between the two spreads matches the record set on Dec. 31.
‘Elevated Levels’
Senior European bank debt lost 1.29 percent last quarter,
including reinvested interest, and has fallen for four straight
months, the longest stretch since the period ended June 2008,
based on Bank of America Merrill Lynch index data.
“Bank funding will become an issue if these elevated
levels in CDS and cash persist,” Suki Mann, senior credit
strategist at Societe Generale SA in London, wrote in a report
to clients. “It was already the hot topic for 2011, and cynics
would suggest that spreads will stay wide or widen further.”
The average cost of insuring Citigroup Inc., JPMorgan, Bank
of America Corp., Wells Fargo & Co., Morgan Stanley and Goldman
Sachs Group Inc. is 139 basis points, from an 11-month high of
198 on June 10, according to CMA. That compares with 210 basis
points for Markit’s European financial index, which includes
swaps on Barclays Plc and Deutsche Bank AG. That’s the highest
since March 2009, the data show.
Commerzbank Swaps
Default swaps protecting senior bonds of Commerzbank,
Germany’s second-biggest lender, jumped to 277 basis points,
from 147 on Dec. 31, CMA prices show. Contracts on Monte Paschi,
the world’s oldest bank and Italy’s third-largest, rose to 356
from 263. The lender received 1.9 billion euros of aid from the
government in December 2009.
Swaps on Landesbank Baden-Wuerttemberg, a Stuttgart-based
state-owned lender that received government cash in the crisis,
climbed to 242 basis points from 159.5, CMA prices show.
The EU’s proposals follow Germany’s Bank Restructuring Act,
which was approved by parliament on Nov. 2 before coming into
force at the beginning of this year. That law also allows
regulators to transfer the assets and liabilities of a failing
bank while permitting the government to write down debt.
Caja de Ahorros y Monte de Piedad de Madrid, the second-
largest of the regional Spanish savings banks, increased to 541
from 457.5 on Dec. 31, CMA prices show. Contracts tied to
Portugal’s Banco Popolare SC rose to 367 from 284. Banco Pastor
SA of Spain jumped to an all-time high 713 from 574 on Dec. 31.
Imposing burden sharing will “push up funding costs,”
said Gary Jenkins, head of fixed-income at Evolution Securities
Ltd. in London. “If you make a grab for other people’s assets,
then you’re going to scare the horses.”