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It has been a year that has seen the headlines dominated by a sovereign debt crisis in Europe. This time last year, the carnage that would be wrought by cripplingly high debt in Greece, Portugal and Ireland was already visible on the horizon. Europeans had already taken concerted action to save Greece, although the cost of those measures remained unknown – as they arguably still are today. Questions were being asked about where that left the other PIGS – Spain was still viewed in a similar light, before distancing itself, and then ultimately being drawn back in.
Many wondered how much stomach northern Europeans had for bail-outs for their profligate cousins in the south.
A year later, despite much having happened in the interim, it is striking that the fundamental questions have barely changed. The bail-out arrangements have been formalised and European leaders have wasted no opportunity to reiterate their commitment to the euro – and to Europe generally. And yet the questions refuse to go away, as the cost of holding the euro together spiral ever-upwards.
In order to get a handle on the crisis, a number of new agencies have been created in recent months. Some of these have gone on to debut in the Top 250 list, including the EFSF (European Financial Stability Fund) and FROB (Fondo de Reestructuracion Ordenada Bancaria – or Fund for Orderly Bank Restructuring).
On a positive note, investors remain more discerning than they were in the dark days of 2008 and 2009, when, such was the paralysing sense of panic in the face of financial Armageddon, little distinction was made between high and low-quality names. Today, there is a sense that investors are assessing each deal for its own merits, and trying to ascertain what a borrower’s exposures might be.
Hence, it has been a generally difficult year for the euro, but US dollar financing has been relatively unscathed. And while deeply indebted sovereigns have been shunned, those less saddled with debt have found a willing audience. Tellingly, the biggest borrower for the year – Fannie Mae – raised US$110bn, up from the nearly US$88bn raised by KfW, which led the table last year.
FIG borrowers have been particularly busy, ahead of regulatory changes being implemented to ensure they have adequate capital buffers if the global economy takes another lurch downwards. This necessity may herald a bright future for contingent capital bonds. Credit Suisse launched the first public, non-coercive CoCo deal in February, the Swiss regulator having beaten others to the punch in providing specifics on its new capital requirements regime. When other regulators catch up, more such deals are likely to follow.
And perhaps the biggest success story of the year has been the covered bond market, which has gone from strength to strength, having served FIG borrowers throughout the crisis. It now solicits interest from a range of new investors that just a few years ago would not have looked at it twice, and is extending its reach into new territories and to new types of borrower. Yet more evidence of a markedly transformed, yet tentatively improving landscape in the debt markets.