European equity markets have shrunk for the first time on the back of a boom in mergers and acquisitions, private equity buyouts and share buybacks – despite record issuance.

It is the first time European, UK and US markets have suffered "de-equitisation" – when more equity is retired than issued – in the same year, according to research by Citigroup. The US market contracted in 1988 after the Wall Street reversal of the previous year and the UK market has been shrinking for three years. A record amount of cheap debt is driving the M&A, buyout and buyback binge which has removed shares from stock markets, especially in the UK, faster than companies can issue them. Some £55bn (€82bn) has been returned to UK shareholders through completed cash takeovers worth £60bn, with £53bn reclaimed via record buybacks and special dividends. This compares with a net loss of £42bn last year and record UK All-Share (index) equity issuance in the year to date of some £60bn, according to Citigroup. Darren Brooks, an equity analyst at Citigroup in London, said: "This year, de-equitisation looks to have been more aggressive than ever, with the All-Share shrinking 3%." Khuram Chaudhry, Merrill Lynch's European quantitative strategist, said: "M&A is one of the biggest factors behind the de-equitisation as companies have followed the attractive strategy of swapping equity for cheap debt." Since 2003, the after-tax cost of raising investment grade debt has been up to 5% lower than the cost of issuing shares.