“Banks that were perceived to have heavy exposure to Greece were penalized,” said John Stopford, the London-based head of fixed income at Investec Asset Management Ltd., which manages more than $90 billion. “Now, maybe people will be more worried about exposure to other parts of Europe.”
A benchmark index of credit-default swaps on European banks and insurers climbed as much as 23 percent last week to a record 218.5 basis points on Aug. 5, according to JPMorgan Chase & Co. The extra yield investors demand to buy bank bonds instead of benchmark German bunds is now 231 basis points, or 2.31 percentage points, the most since Jan. 20, Bank of America Merrill Lynch data show.
Bondholders are assigning a higher perceived risk to bank debt on concern that last month’s second Greek bailout won’t prevent the sovereign crisis from engulfing Spain and Italy, deepening lenders’ losses on government securities. The ECB, which last week broke an 18-week hiatus by buying Irish and Portuguese securities, said yesterday it will “actively implement” its bond-purchase program, and said it welcomed pledges from Italy and Spain to reduce their deficits.
“There’s a lot of volatility around sovereigns, which leads to uncertainty for banks and warrants a premium,” said Hans Stoter, head of credit investments at ING Investment Management in the Hague, Netherlands, which manages 218 billion euros of fixed-income assets.
Societe Generale (GLE) SA said last week it may miss its 2012 earnings target after discounting the value of its Greek notes, following similar writedowns by institutions including Deutsche Bank AG and BNP Paribas SA. Analysts have cited concern that banks don’t have sufficient capital to endure further writedowns as a motivation for EU leaders to bolster sovereign debt values in the region.
Sales Stutter
Bank bond sales slowed to about 7.7 billion euros ($11 billion) since the beginning of July, the lowest this year and less than half the 27 billion-euro monthly average for 2011, according to data compiled by Bloomberg.
Greece’s second rescue package proposed that banks accept a 21 percent writedown on the value of their Greek debt. Europe’s 90 biggest lenders hold about 98 billion euros of the country’s notes, the European Banking Authority said July 15.
In a statement issued in the name of President Jean-Claude Trichet after an emergency teleconference meeting of policy makers yesterday, the Frankfurt-based ECB said “a decisive and swift” implementation of reforms by both governments is “essential.” It also called on all euro-area governments to follow through on the measures agreed at a July 21 summit, including allowing the European Financial Stability Facility to purchase bonds on the secondary market.
Greece’s bailout terms may set a “precedent” for future restructurings, according to Fitch Ratings and Moody’s Investors Service. Last week, Standard & Poor’s removed its AAA rating for U.S. Treasuries, citing a political impasse that cannot reduce the deficit of the world’s biggest economy.
SocGen, France’s second-largest bank, reported a 31 percent drop in second-quarter profit because of a 395 million-euro writedown on Greek government debt. Deutsche Bank took a 155 million-euro hit and BNP Paribas (BNP) marked down 534 million euros of Greek IOUs. Royal Bank of Scotland Group Plc said Aug. 5 that it lost money in the first half after writing down Greek holdings by 733 million pounds ($1.2 billion).
Crisis Contagion
Speculation that other countries will succumb to the crisis drove yields on Italian and Spanish government debt to euro-area records and closer to the 7 percent level that presaged the rescues of Greece, Ireland and Portugal than the 2.34 percent borrowing cost of Germany, which has set the benchmark lending rate since the inception of the common currency.
“If Italy is sucked into the peripheral crisis then it starts to become a systemic issue for European banks because Italian government debt is quite widely held,” said Roger Doig, a London-based analyst at Schroders Plc, which manages 36.5 billion pounds of fixed-income assets. EU agencies may have to purchase as much as 850 billion euros of Italian and Spanish debt, or about half of the amount actively traded, according to a note published yesterday by strategists at Royal Bank of Scotland Group Plc.
European banks outside Italy held $233.5 billion of the country’s public-sector debt at the end of March, while foreign lenders held $90.3 billion of Spanish state obligations, according to the Bank for International Settlements in Basel, Switzerland.
Swaps Surge
The Markit iTraxx Financial index of credit-default swaps on the senior debt of 25 banks and insurers climbed to 211 basis points, the highest since March 2009, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. That’s 71 basis points more than the Markit iTraxx Europe Index of investment-grade companies, the biggest gap in five months.
The 10-year euro swap spread, which shows the difference between the swap rate and the yield on German bunds and is used as a measure of perceived risk, has climbed 78 percent in the past five weeks to 69.93 basis points. The spread reached an 18- month high of 73.34 basis points Aug. 4.
European governments’ deteriorating finances contrast with the relatively robust balance sheets of the region’s non- financial companies, which have been “hoarding liquidity,” according to Dagmar Kent Kershaw, head of credit fund management at Intermediate Capital Group Plc in London, which manages 12 billion euros of assets.
Corporates Safer
Yield premiums on non-financial corporate bonds are rising at a slower pace than on bank debt, with spreads increasing 11 percent since the end of June to 139 basis points, according to Bank of America’s EMU Corporates Non-Financial index of bonds issued by companies including BP Plc and Daimler AG.
Non-financial corporate securities returned 0.6 percent this month, compared with 0.3 percent from bank bonds, Bank of America index data show.
“Non-financials might be viewed as a safer-haven investment, but spreads here are widening too,” said Suki Mann, head of credit strategy at SocGen in London.
The European Central Bank restarted its bond-purchase program to prop sovereign debt markets last week following a four-month hiatus, though it limited itself to buying the debt of Ireland and Portugal. World stock markets lost more than $4.4 trillion since July 26 as speculation mounts that the global economy faces a recession that would send more countries begging for international bailouts.
Italian lenders UniCredit SpA and Banco Popolare SC (BP) led Bank of America’s Euro Banking index of bond spreads wider since the start of July. Relative yields on the debt of UniCredit, Italy’s biggest bank, surged 189 basis points to 444 on Aug. 4 and Banco Popolare bond spreads widened 179 basis points to 463, the index data show.
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