Death of bond salesmen as banks rethink EU auctions

Fri Dec 9, 2011 2:49pm EST
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By Douwe Miedema

LONDON (Reuters) - European governments -- many of which are already struggling to woo buyers for sovereign debt -- could find it even harder to raise money as the investment banks they relied on to sell the debt baulk at the cost.

Banks are reconsidering the cozy relationships that in the past saw them subsidize bond sales in the hope it would curry favor with governments and lead to other lucrative business, such as state privatizations.

Any bank designated by a country as a primary dealer must commit to buying a certain percentage of government-issued bonds in return for a guaranteed chance to participate in the auction.

This was once a coveted position given the regularity of debt auctions, but scarce capital means banks are now not willing to take on the increasing risk of being left with unsold bonds.

"Being a primary dealer is an expensive business," said one market participant at a large investment bank.

"Banks will start to focus (now that) they have fewer resources. Does it really make sense for somebody to be in Spain or in Portugal?", this person said, speaking like others on condition of anonymity due to commercial sensitivity.

Banks used to buy bonds from government debt management agencies at a loss, in the hope of earning fees when governments sold bonds directly to investors via separate syndicated deals. These are auctions where a government sells bonds to investors through a designated syndicate of banks.

If banks do walk away from bond auctions, the loss of guaranteed buyers is likely to boost interest costs for cash-strapped countries in Europe, making life more difficult just as they need to plan to issue some 800 billion euros ($1,100 billion) of debt next year alone.   Continued...