Good news and bad news

I have two news: good news and bad news, which one first? Head good news, tail bad news. The good news is good news. I am done for today.

WSJ
A chink of light in the credit markets?

BNP Paribas this week became the first European bank to raise capital on the bond market without a government guarantee since October. It has now been followed by Societe Generale and Banco Intesa, which both announced new bond issues on Wednesday. But don't put the champagne on ice just yet.


First, the banks are paying a high price for these deals. BNP Paribas paid a margin of 160 basis points over the benchmark euro swap rate, while SocGen is likely to pay a margin of around 185 and Banco Intesa 195-200. That's a far cry from the single-digit margins banks paid back in early 2007. It's also a lot more than banks have been paying for guaranteed deals. HBOS recently issued a U.K. guaranteed bond at a 30 basis-point margin.

Of course, whether the banks are getting a good deal depends on the price of a guarantee. The French government has never disclosed the terms of its guarantee, so it is impossible to calculate a breakeven cost of financing for BNPP or SocGen. What's more, unusually under the French scheme, the banks do not issue bonds under their own name. Instead, the state raises the money and hands it on -- invariably in smaller sums than the banks would like. That has given them an added incentive to go to the market directly.

Meanwhile, the Italian scheme has so far not been used by any bank. That's because the Italian government has a lowly credit rating and its bonds are not widely traded. As a result, its guarantee is not thought to be worth much.

Still, the fact these three banks were able to raise money at all is good news. It shows that credit investors are regaining their risk appetite. The investor base for nonguaranteed bonds is different to that for government paper. An important new pool of liquidity has reopened just as the government paper market is starting to risk becoming saturated.

Not all banks are as strong as BNP, SocGen and Intesa. And not all will feel the need to pay a premium for their capital to prove a point. The real test of the market will be when U.S., U.K., German and other European banks decide to tap the market too. But the success of these latest issues surely brings that moment a step closer.

The bad news? Will tell you tomorrow, if it ever comes.