Debt funding gap more than doubles in Europe: DTZ

Nearly 85% of the $216 bn (EUR 167 bn) global gross debt funding gap will be in Europe over the next two years, according to new research published on Friday by DTZ.

In its latest 'Global Debt Funding Gap' report, the broker estimates that Europe's debt funding gap has more than doubled to $182 bn (EUR 140 bn), predominantly as a result of new rules introduced by the European Banking Authority (EBA) which significantly increased new capital reserve ratios.

The EBA's new tier-one capital reserve ratio of 9% applies to 65 European banks that are under its review. A recent analysis by the International Monetary Fund (IMF) estimates that this rule will reduce banks' loan assets by between 6% and 10% over the next two years. Based on this finding, DTZ’s research 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.

'Based on our analysis, this increases the debt funding gap by $107 bn to a gross level of $182 bn over the next two years,' said Nigel Almond, associate director of Forecasting & Strategy at DTZ and author of the report. '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. 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 real estate loan sales of EUR 30 bn, which are likely to transact at large discounts to this notional amount. Recent sales have been in the range of between a 30% and 80% discount.

DTZ said 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 $75 bn 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 $107 bn on a net basis.