New bond issuance from banks in Europe seized on Wednesday after Standard & Poor's credit rating downgrades on Greece and Portugal threatened to hike funding costs for banks from the continent's so-called "periphery".
The primary market shut-down is temporary, bankers said, but if credit spreads remain elevated for banks from Portugal and Spain it will cause pain in terms of their financing.
"The banking sector is getting hit again," said Gary Jenkins, head of fixed income research at Evolution Securities. "Banks will find it tougher to raise money."
Credit default swaps -- derivatives that offer insurance against corporate defaults -- on banks have jumped wider after Standard & Poor's downgrade of Greece and Portugal late on Tuesday and as concerns over Greece's debts have intensified.
Banks are heavily impacted by sovereign concerns because of implicit government backing for them.
Late on Wednesday S&P downgraded Spain one notch from AA+ to AA and kept the outlook on negative.
Five-year CDS on Portugal's Banco Espirito Santo, for instance, were about 100 basis points wider at about 478 basis points, Markit data showed.
"The peripheral banks are my greatest concern," said Jeroen van den Broek, head of investment grade credit strategy at ING.
"They have debt redemptions to the tune of 170 billion (euros) this year. They are already very dependent on money markets for their funding, so their maturity curves are getting shorter and shorter," he said.
Funding cost hike
Van den Broek said higher funding costs were not an immediate problem, but if spreads stayed wide for the "periphery" in the longer term it could become one.
If other rating agencies downgrade Greece to junk, banks would ultimately not be able to use the country's bonds as collateral for financing with the European Central Bank (ECB).
The ECB earlier this month helped Greece by relaxing rules to allow Greek bonds to remain eligible for collateral that banks use to get cheap ECB funding.
"The downgrade of Greece to BB+ (by S&P) now makes it possible that even the expanded rules will not be enough to ensure that Greek bonds can be used as collateral," bank analysts at CreditSights said in a note.
Money markets, used by banks for short-term funding, showed signs of stress on Wednesday, a worrying sign that the Greek crisis is starting to impact bank credit and financial market liquidity.
Bank analysts at Credit Suisse said increased risk aversion towards the banking sector was important also for UK banks, which have substantial refinancing needs.
"We estimate that Barclays, Lloyds and Royal Bank of Scotland will experience 300 billion pounds of redemptions of term wholesale funding between now and December 2012," the Credit Suisse analysts said in a note.
"An environment in which funding markets do not continue to improve would be unhelpful."
Banks from Europe's "core" have not suffered the same degree of fallout from the Greek downgrade, bankers said.
Some subordinated and senior bank bonds in the cash market have also started to rally after details of a Greek rescue deal began to emerge.
"I would hesitate to say the primary market's closed for solid bank names," said one financials institution syndicate banker. "It feels more like a price, confidence issue."
ReutersLast Mod: 28 Nisan 2010, 20:51