DTZ Research has released its latest Global Debt Funding Gap report, estimating that nearly 85% of the US $216 billion (approx. 168 billion) global gross debt funding gap will be in Europe over the next two years (2012-2013).
Compared to previous reports, the most significant changes are centered on the European markets. This is predominantly the result of the European Banking Authority's (EBA) new rules and the emergence of new non-bank lenders in the region.
The EBA's new tier one capital reserve ratio of 9% applies to 65 European banks that are under its review. A recent analysis from the International Monetary Fund (IMF) estimates the impact of this rule on banks' loan assets as between a 6 and 10% reduction over the next two years.
Based on this, DTZ's analysis assumes that under the IMF's 'current policies' scenario a 7% reduction in commercial real estate loan assets would be implemented over the same period. DTZ's report applies this 7% EBA loan reduction in combination with the original limited LTV refinancing analysis. This allows us to differentiate the impact for each country of the new EBA rules.
Nigel Almond, Associate Director of Forecasting & Strategy at DTZ and author of the report comments: "Europe's debt funding gap more than doubles due to the EBA's regulatory changes. Based on our analysis, this increases the debt funding gap by US $107 billion to a gross level of US $182 billion over the next two years.
"Countries that we previously estimated to have small debt funding gaps, like France, Germany, Italy and the Netherlands are now seeing big increases in their gaps. In contrast, countries that we previously estimated to have large debt funding gaps, like the UK, Spain and Ireland are showing no or limited increases in their gaps as the new rules have a relatively limited impact on these markets."
Banks have continued to make progress on both their prime and non-prime loans, as evidenced from DTZ's recent lenders' survey. In addition, there have been a significant number of loan portfolio sales, especially in the UK. Going forward, more sales in continental Europe are anticipated. DTZ Research has identified potential loan sales of 30 billion, which are likely to transact at large discounts to this notional amount. Recent sales have been in the range of between 30% and 80% discount.
There is potential for the debt funding gap to be reduced through the growing number of insurers and other non-bank lenders increasing their activity across Europe.
Following a number of US insurance groups, more deals from UK and other European insurers are expected, while private equity fund managers are also launching dedicated debt funds. Based on this, DTZ Research estimates there to be US $75 billion of new non-bank lending capacity over the same two-year period. This offsets the EBA-triggered increase in Europe's debt funding gap to US $107 billion on a net basis.
Hans Vrensen, Global Head of DTZ Research, said: "On balance, we estimate that there is US $109 billion of new equity available. This is just about sufficient to bridge the US $107 billion net debt funding gap for Europe.
"On a global level, the two-to-one ratio of available equity versus the net debt funding gap is twice as favorable as in Europe. However, pricing does need to remain attractive enough to attract new non-bank lenders and equity alike over the next two years."
Source: DTZ Research