Bankers must prepare to buy more sovereign bonds and grapple with the difficulty of making any kind of return out of them. In some ways, the new business of international banks is going to resemble the old business of emerging market banks.
When interest rates were high and credit risk unattractive, the easiest form of banking in an emerging market was to raise deposits and lend them to the government.
Brazilian banks made a healthy living out of this for many years until economic conditions improved and lending to the real economy became more compelling.
Now banks in mature markets may find themselves in a similar position with one important difference – interest rates are rock bottom and making any kind of margin out of government securities will be near impossible.
Little choice
But bankers may not have much choice. They are labouring beneath a cloud of public hostility and those which have accepted government bail-outs may be obliged to buy sovereign bonds as a way of saying thank you – especially if other investors are thin on the ground, as posited in this month’s cover story (see Drowning in debt).
Governments are busy overhauling their distribution systems and getting to market early – as in the case of recent Greek and Dutch issues – but that still may not be sufficient to win over investors, given the scale of issuance. The US is planning to unleash between $1500bn and $2500 bn in fiscal 2009, eurozone supply is likely to spike 30% to €700bn and the UK’s issuance will more than double from levels two years ago to hit £146bn ($209bn).
Bonds anyone? Why not call the banks. Furthermore, regulators may insist that banks hold more government securities for liquidity reasons and so “kill two birds with one stone” as the saying goes.
It’s going to be tough for banks – pleasing regulators, governments, shareholders and the customers might surpass any challenges thrown up in recent years.
