Because the European crisis is seriously reducing the value of European banks' longer-term debt, some of them are buying back their debt from investors at a discount from the original value, The Wall Street Journal reports, thereby increasing profits by booking the difference in price as an accounting gain.
Traditional ways of increasing capital, such as raising equity in the market or selling businesses, are proving difficult because investors are wary of lending to banks.
However, some analysts say that buying back their own debt destroys banks’ avenues of necessary low-cost, long-term funding for loans and operations, which could make banks more dependent on the low-cost funding lifeline from the European Central Bank and create additional funding problems later on.
Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown
"If you have poor access to the private markets, these [buybacks] will tend to beget further central bank usage," Alastair Ryan, an analyst with UBS in London, told The Journal. "And the more central bank funding you have, the less likely you are to get private money in the future."
Andre Rodrigues, an analyst at Portugal's Caixa Banco de Investimento, said, "From a financial point of view, it makes sense for banks to buy back their bonds. Of course, it is true that the banks are losing source of private funding," The Journal reported.
According to the three-month, cross-currency basis swap, a money-markets indicator, the cost for European banks to borrow in dollars held at the lowest level in more than a year, Bloomberg reported.
Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown
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