The Eurosystem’s second covered bond purchase programme (CBPP2) will play second fiddle to the euro-zone sovereign debt crisis in influencing 2012 issuance volumes, according to analysts, who highlight the difficulty of forecasting volumes in a fast moving, volatile market.

“The key point is that we have to solve the sovereign problem,” said Frank Will, head of covered bond research at Royal Bank Scotland. “Even if the ECB buys 10% to 20% of a new issue, it does not mean that other investors will take up the remaining 80%-90% if the issuer is based in a distressed country.”

Jörg Homey, head of covered bond research at DZ Bank, also said that as long as the euro-zone crisis continues, it will be difficult for markets to settle.

“The sovereign debt crisis will be the most important driver of issuance next year,” he said.

“As a second topic we have this covered bond purchase programme and I believe the obligations á l’habitat can benefit more than other markets.”

EC President José Manuel Barroso

Supply forecasts for 2012 range from Eu100bn-Eu250bn, with analysts struggling to pin down a number given an uncertain market backdrop.

“Overshadowed by ongoing spill-over effects from the peripheral European sovereign debt crisis and continuously mounting fears regarding the accessibility of the global money and capital markets, forecasting covered bond supply in 2012 is extremely challenging,” said Morgan Stanley analysts Leef Dierks and Jason Somerville.

RBS’s Will said covered bond issuance in 2012 will heavily depend on the further development of the sovereign debt crisis in Europe and could end up everywhere between Eu100bn-Eu250bn.

“Given the current state of the financial market, it’s even difficult to forecast the volume for the rest of the year, let alone next year,” he said. “I’m surprised to see other houses coming out with exact forecast figures for 2012.

“Market sentiment changes so fast and depends so much on political decisions by the key players in Europe with tail risk increasing by the day, that it is almost impossible to put a number on total supply.”

Having acknowledged the difficulty in estimating issuance volumes next year, Morgan Stanley’s analysts forecasted euro denominated benchmark covered bond supply to amount to Eu190bn in 2012, with net growth of around Eu90bn.

“Several of the estimates made are based on the assumption that the situation in the markets is not going to further deteriorate but will instead stabilise in the weeks and months ahead,” they said.

Another analyst said he expected diminishing primary market volumes in peripheral countries, as well as minor shifts in funding activities in other covered bond countries, leading him to estimate Eu175bn of supply for next year.

In addition to the sovereign debt crisis and CBPP2, analysts said that the extent to which France’s creditworthiness comes under – further – pressure is an important factor in next year’s supply.

“In four out of the last five years, French issuers on aggregate comprised the lion’s share of the euro denominated benchmark covered bond market,” said an analyst. “We are convinced that the 2012 pole position will go to France again – despite the Damocles’ sword still hanging over France’s Aaa/AAA/AAA.”

He expects around Eu45bn of supply from France in 2012.

Morgan Stanley analysts also attributed Eu45bn – “the better part of issuance” – to France, with Eu25bn expected from Germany, Eu20bn from Spain, and Eu20bn from the UK.

RBS’s Will also said France’s situation is very important.

“It’s getting wider and wider, and we have to solve this,” he said.

Natixis analysts Cristina Costa and Jennifer Levy said that widening of French government bond spreads continues to weigh on French covered bonds, with obligations foncières and obligations de financement à l’habitat widening by around 10bp-15bp since last week.

Morgan Stanley analysts estimate Eu100bn of redemptions in 2012, which they believe is a manageable amount to refinance.

“These amounts are mostly within the range of that could be refinanced in the markets,” they said, “even though we highlight that, in the case of Germany, due to the consolidation and deleveraging, needs should be significantly lower than the amount of covered bonds maturing.”

They said that redemptions are set to peak at Eu17.1bn in February 2012, followed by January (Eu16bn) and October (Eu12.6bn).

Redemptions of German Pfandbriefe are highest, at Eu38.5bn, followed by Spain with Eu18bn and France with Eu15.3bn, according to the analysts.

Natixis analysts said that a large volume of maturing government guaranteed bonds will be partially funded through covered bond issuance.

“However, as was the case for most of 2011, we believe 2012 will be overshadowed by continued sovereign debt pressures, macroeconomic spill-over effects, as well as the continued deleveraging of European banks, leading to lower funding needs,” they said. “In addition, it is to be seen whether investors’ risk-off mode improves and there is a return in risk appetite.”

Analysts said that jurisdictions outside the euro will continue to benefit from the euro-zone sovereign debt crisis.

“Covered bonds from the Nordic countries have benefited from being perceived as a safe haven over the financial and sovereign debt crisis,” said Natixis’s analysts. “We expect covered bond issuers from the Nordic region to be a main driver in 2012.”