European Lending Squeeze Risks Crimping Growth

As banks cut loans, companies tap the bond markets if they're able to.

Europe’s corporate bond market is shrinking as redemptions outstrip issuance, banks borrow and lend less, and companies stockpile cash rather than invest in their businesses.

Banks have sold about 335 billion euros ($427 billion) of bonds in the common currency and pounds this year, down from 443 billion euros last year, 503 billion euros the year before and a record 671 billion euros in 2009. Banks cut their lending to euro-area companies by 45 billion euros in the third quarter from a year earlier, according to the European Central Bank.

Spread Compression

Yields on Spanish 10-year bonds, which peaked at 7.75 percent on July 25, have fallen to about 5.7 percent, about 432 basis points more than similar-maturity German debt. Italian 10-year bonds yield 4.9 percent, down from a peak of 6.71 percent, also on July 25, and now pay a 352 basis-point premium to bunds.

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