Stress tests fail to calm markets
Source: Agencies |
July 19, 2011, Tuesday
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Print Edition
Print Edition
BANKS with substantial peripheral eurozone bond holdings, and those that only scraped through the European Union's stress test of 90 lenders, started feeling the heat yesterday from investors anxious they should beef up their capital buffers.
The European Banking Authority said late on Friday eight banks failed the test with a total capital shortfall of 2.5 billion euros (US$3.5 billion).
This amount - puny in the broader context of European banking - sparked a repeat of last year's accusations that the stress tests were again unrealistic given the eurozone's sovereign debt crisis.
The major shortcoming of the test was the lack of real stress applied to eurozone bonds held in long-term banking books. Adding in a realistic stress on peripheral eurozone bonds would add at least 20 billion euros to capital needs and maybe more than double that, analysts said.
Early yesterday the European bank sector was down 1.5 percent, hovering just above the two-year low hit last week. Intesa Sanpaolo, Unicredit, Deutsche Bank, Societe Generale and Barclays all fell more than 3 percent.
Current market prices imply a much more severe loss than the EBA's assumption of a 15 percent loss on Greek bonds and a 1 to 2 percent "haircut" on Irish and Portuguese debt.
The EBA data showed banks held 98.2 billion euros of Greek bonds (67 percent held by domestic banks), 52.7 billion euros of Irish sovereign debt (61 percent held domestically) and 43.2 billion euros to Portugal (63 percent at home). Applying more realistic losses of 40 percent on Greek bonds and 25 percent on Portuguese and Irish debt would add over 45 billion euros to capital needs.
The knock-on effect on funding markets could be even more damaging, leaving attention fixed on how talks progress later this week on finding a solution to the Greek crisis.
"The European banking sector is captive to politics at the moment," said Hank Calenti, credit analyst at Societe Generale.
Eurozone leaders will meet on Thursday in a bid to agree on a second bailout for Greece and a package to address the broader fiscal woes of the eurozone that last week moved beyond Greece, Portugal and Ireland to Italy and Spain.
This broader package may include measures whereby banks agree to take a hit on the sovereign debt they hold to give eurozone countries more breathing space to recover.
The EBA test, though flawed, did provide over 900 pages of data, including 250 on Spanish banks alone. "The key positive is greater understanding and recognition of sovereign stress," Huw van Steenis, analyst at Morgan Stanley, said in a note.
The European Banking Authority said late on Friday eight banks failed the test with a total capital shortfall of 2.5 billion euros (US$3.5 billion).
This amount - puny in the broader context of European banking - sparked a repeat of last year's accusations that the stress tests were again unrealistic given the eurozone's sovereign debt crisis.
The major shortcoming of the test was the lack of real stress applied to eurozone bonds held in long-term banking books. Adding in a realistic stress on peripheral eurozone bonds would add at least 20 billion euros to capital needs and maybe more than double that, analysts said.
Early yesterday the European bank sector was down 1.5 percent, hovering just above the two-year low hit last week. Intesa Sanpaolo, Unicredit, Deutsche Bank, Societe Generale and Barclays all fell more than 3 percent.
Current market prices imply a much more severe loss than the EBA's assumption of a 15 percent loss on Greek bonds and a 1 to 2 percent "haircut" on Irish and Portuguese debt.
The EBA data showed banks held 98.2 billion euros of Greek bonds (67 percent held by domestic banks), 52.7 billion euros of Irish sovereign debt (61 percent held domestically) and 43.2 billion euros to Portugal (63 percent at home). Applying more realistic losses of 40 percent on Greek bonds and 25 percent on Portuguese and Irish debt would add over 45 billion euros to capital needs.
The knock-on effect on funding markets could be even more damaging, leaving attention fixed on how talks progress later this week on finding a solution to the Greek crisis.
"The European banking sector is captive to politics at the moment," said Hank Calenti, credit analyst at Societe Generale.
Eurozone leaders will meet on Thursday in a bid to agree on a second bailout for Greece and a package to address the broader fiscal woes of the eurozone that last week moved beyond Greece, Portugal and Ireland to Italy and Spain.
This broader package may include measures whereby banks agree to take a hit on the sovereign debt they hold to give eurozone countries more breathing space to recover.
The EBA test, though flawed, did provide over 900 pages of data, including 250 on Spanish banks alone. "The key positive is greater understanding and recognition of sovereign stress," Huw van Steenis, analyst at Morgan Stanley, said in a note.
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