Global support efforts may revive debt markets

Joint efforts made by governments all over the world may help in reviving the wounded debt markets.
The concerted efforts launched by governments around the world to support financial institutions should help revive the wounded debt markets. They will also help to stabilise the day-to-day operating environment for the banking industry, according to a report by Standard & Poor's.

Governments around the world from the United States, to Europe to Asia have pumped billions of dollars into their respective banking systems to help banks recapitalise and to kick-start interbank lending, which has been in deep freeze since the collapse of Lehman Brothers in September.

South Korea's government was the latest to announce measures to help its banking industry when it said on Sunday that it will provide loan guarantees worth $100 billion for foreign currency debt held by Korean banks, while injecting $30 billion into its banking system.

"In our view, this should help restore confidence in the world's banks, allowing investors and counterparties to begin assessing banks again on their business strengths," says Scott Bugie, credit analyst at Standard & Poor's.

The measures should underpin bank creditworthiness in the short term by shoring up liquidity and augmenting the sector's regulatory capital, Bugie says.

ôWe do not expect, however, that these actions in themselves will improve fundamental earnings and asset quality, which will remain under pressure for financial groups in the US, Western Europe, and several countries in Eastern Europe and Asia. In addition, the differences among various countries' support packages, and their complexity, may delay the measures' initial impact,ö the credit analyst says.

S&P is also positive on the support measures from a credit perspective, particularly since they greatly reduce financial institutions' risk of a rapid loss of funding and sudden default.

ôWe should see some improvement in Asia as financial institutions would be encouraged by the massive dose of funding,ö says a DCM banker. He says the injection of billions of dollars of cash into the banking system should convince banks to start lending to each other again.

Bugie says that the proposed government measures collectively represent a seismic shift in the global banking industry because they provide explicit evidence that states around the world stand behind their banking industries.

S&P believes that this shift alone should help restore confidence in the debt markets. However, the support measures are designed to be temporary and to be mostly paid for at market prices.

They also differ substantially from jurisdiction to jurisdiction, and banking groups will partake of the support to varying degrees, or not at all. So, although the measures stand to restore confidence, their effectiveness may vary from country to country and bank to bank, according to S&PÆs report.

The report also points out that changes of this magnitude will be more complex to implement than they appear at the beginning, and they may have unpredictable consequences. ôGovernments, in our view, will have to work out the details of the rapidly announced support measures over the next few weeks,ö the report says.
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