Published: Last updated: June 11 2010 18:20
Moody’s reckons European banks are safe. That’s funny. Credit default spreads on the sector this week blew out close to record levels; interbank rates have risen sharply and the European Central Bank is sufficiently worried to have stumped up $442bn of liquidity to lenders over the past year. So who to believe: actual investors and supervisors, or the people who mistook junk for triple-A?
European banks hold sovereign debt that could yet turn sour and are dependent for growth upon economies that are flat on their backs.The eurozone’s peripheral economies of Greece, Portugal, Spain and Ireland had debt of between 53-115 per cent of gross domestic product last year, according to Eurostat. European banks hold almost €2,000bn of this. But the greater concern is banks’ exposure to the sputtering real economies of, for example, Spain. More than half the €940bn aggregate exposure of the 30 European banks Moody’s surveyed is to Spain’s struggling private sector. So long as interest rates remain low, heavily-indebted Spaniards can keep servicing their loans. But that will change when rates rise, especially since a quarter of Spaniards are unemployed. True, some of Europe’s biggest banks have disclosed exposures that are comfortably covered by earnings. But so far only listed ones have come clean. Yet to be quantified is the dross in Germany’s unlisted Landesbanken and savings banks, or Spain’s cajas, groaning under duff property loans. Morgan Stanley estimates the latter could need €43bn of capital. Only once public stress tests have ascertained the extent of damage across all European lenders will investors be in a position to make informed decisions.
For Moody’s to put its seal of approval on the sector is at best premature and at worst simply wrong. Then again, investors should now know to be especially wary of taking the word of rating agencies at face value.
BACKGROUND NEWS
European banks can absorb “severe” losses on their exposure to Greek, Portuguese, Spanish and Irish assets without having to raise additional capital, Moody’s, the credit rating agency, said in a report issued on Friday.
The analysis, based on Moody’s own “stress test” of more than 30 European banks from 10 countries, may ease fears about the financial sector’s exposure to embattled eurozone economies amid the spectre of a Greek debt default.
“Based on our stress test, we believe that these banks would be able to absorb the losses that could arise from such exposures without requiring capital increases – even under worse-than-expected conditions,” said Jean-Francois Tremblay, one of the authors of the report.
Copyright The Financial Times Limited 2010
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