A long-awaited thaw in funding for euro zone banks has spread to troubled southern countries after Santander followed Italian rival Intesa to raise cash, further evidence that central bank action to head off a crisis is restoring confidence.
Urged on by banks, the European Central Bank (ECB) provided almost half a trillion euros of ultra-cheap, long-term cash in December, and the prospect of more to come has given investors an appetite to invest and banks the confidence to issue.
The national champions in all peripheral markets can now issue, said Torsten Elling, co-head of rates syndicate at Barclays Capital.
The question each borrower has to ask themselves is whether economically it looks attractive and makes sense...The improvement seen throughout January meant that if they need to fund the market is now open.
That followed hot on the heels of a 1.5 billion euro bond issue by Intesa Sanpaolo's
Those deals were underpinned by a fall in borrowing costs for Italy and Spain and improved confidence in the health of their sovereign bonds, despite lingering fears of a deep recession.
That's the result of the ECB's 489 billion euro injection of 3-year funds to 523 euro zone banks, leaving a record amount of excess liquidity in the banking system.
That has helped inspire a lively start to the year for bond issuance, with over 60 billion euros raised in the best month since the first half of last year.
Until Intesa most of the deals were from the stronger countries of the Nordic region, Britain, Germany, Switzerland and the Netherlands.
Bank-to-bank lending rates in the euro zone also neared 11-month lows and demand for ECB dollar funding fell on Wednesday, further evidence of the easing strains.
THREE TIMES DEMAND
Santander's three-year covered bond deal will price later on Wednesday but was expected to be sold at 210 basis points over mid-swaps, lower than the 230bp initially expected, after attracting demand for more than three times the offer.
Spanish banks have struggled to fund in the public market since the summer as investors shunned lenders exposed to peripheral sovereign debt.
Bankers were also surprised at the demand for Intesa's deal, when more than 70 percent of the issue was sold outside of Italy, according to a banker involved in the deal.
That showed international investor demand is finally returning, largely because the ECB's move has reassured them that no bank is going to collapse due to a lack of liquidity.
The LTRO has achieved what the European Union has been trying to do for months and has got confidence back into the system, a debt market banker said.
Intesa sold its bonds for less than expected, although it will still pay interest of 4 percent, far higher than the 1 percent borrowing on offer from the ECB.
Both the Santander and Intesa deals were about signalling to the market they do not have to rely on the central bank for support, bankers said.
Securing funding from the ECB is one option but getting a successful transaction done is also a very powerful statement to the market about how strong your name is, said BarCap's Elling.
The ECB will offer another round of 3-year loans on February 29. At least as much as December and maybe as much as 1 trillion euros could be taken then, bankers and analysts estimate.
But there remain worries that money is not flowing through to the wider economy, that underlying problems are unresolved and lenders' reliance on central bank help has been extended.
Almost half a decade after the ECB first provided emergency support, the funding problems for the European bank sector remain unresolved, Simon Samuels, analyst at Barclays Capital, said in a note.
Those heavily reliant on ECB funding run risks of interference as a price for continued support, he said.
Central bank support should slow the pace that banks are cutting lending, but is unlikely to reverse or even halt the trend as banks try to lift profitability and meet tougher regulatory requirements, bankers said.
A quarter of euro zone banks expect to make it harder for firms to get loans in the future, the ECB warned, even though the massive cash injection had eased the prospect of a full-blown credit crunch.
(Reporting by Helene Durand at IFR and Steve Slater at Reuters; Additional reporting by Aimee Donnellan and Marc Jones; Editing by David Cowell)