By David Oakley in London
Published: Last updated: June 20 2010 20:36
Fears are rising over French and German banks’ exposure to weaker economies in the eurozone such as Greece, Portugal and Spain after moves to publish bank stress tests in Europe.
Investors warn the tests could expose the European banking system’s interdependence and spread contagion, which started with Greece, to the continent’s two biggest economies.
Elisabeth Afseth, fixed-income strategist at Evolution, said: “The stress tests have focused some investors’ minds on the exposure of France and Germany to the peripheral economies. This could put the French and German bond markets under pressure.”
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The Bank for International Settlements published figures last week showing that French and German banks were particularly exposed to Greece, Ireland, Portugal and Spain.
French and German banks could suffer heavy losses in the event of a country defaulting on its bonds. Most investors expect Greece to default, while the chances of the others following are increasing.
Although many investors fear European policymakers will stop short of testing the banks over the possibilities of a Greek or sovereign default, they warn that this is becoming an issue, particularly in France. People close to the tests have signalled that publication is set to contain some disclosure of sovereign exposures.
Germany has started addressing the problems of some of its banks, including the restructuring Hypo Real Estate, the nationalised property lender.
France has a big budget deficit and could less easily afford to bail out its weak banks.
Some fund managers have sold French debt because of concerns about the banks’ exposure to Greece, while others are reducing their exposure to every bond market in the eurozone, including Germany. If Spanish and Portuguese markets come under renewed pressure, this will prompt more investors to offload other eurozone debt because of the interdependence of the markets, analysts say.
Fredrik Nerbrand, investment strategy head at HSBC Private Bank, said: “While European banks have a $272bn [€220bn] exposure to Greece, they have a $851bn exposure to Spain and a $606bn exposure to Ireland. If any of the problem nations were to experience the type of pressure that Greece is under, the contagion effects on the European banking system could spark another liquidity squeeze.”
The BIS said German and French banks had combined exposures of $958bn to Greece, Ireland, Portugal and Spain at the end of 2009 in its quarterly report published on June 14.
Copyright The Financial Times Limited 2010.
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