Friday 19 January 2018

European bank stocks plunge to three-year lows

Gavin Finch and Howard Mustoe

4.6pc

The decline in the Euro Stoxx Banks index

BANKS

EUROPEAN bank stocks slipped below the low they set in March 2009 as investors awaited a resolution to Greece's political impasse and Spanish credit risk surged.

The Euro Stoxx Banks index sank as much as 4.6pc as CaixaBank led a sell-off in Spanish banks and the yield on the country's 10-year government bonds surpassed 6pc. Both Bank of Ireland and Allied Irish declined in Dublin.

Investors are taking fright after Greek politicians failed to form a government, heightening concern about the likelihood of a break-up of the euro area.

The cost of insuring Spanish government debt against default surged to a record on speculation that a bailout of Bankia, the nation's third-biggest lender, won't fend off a banking crisis triggered by bad real-estate loans.

"It's not the shock and awe issues of 2008, it's much more the longer-term malaise of the market," said Christopher Wheeler, an analyst at Mediobanca. "It's pretty scary."

Moody's will start cutting the credit ratings of more than 100 banks later this month, a move that risks pushing up their funding costs and forcing them to curb lending.

BNP Paribas, France's biggest lender; Deutsche Bank, Germany's largest; and New York-based Morgan Stanley are among firms that face having their short- and long-term debt downgraded to their lowest-ever levels, the ratings company said in February.

"I'd like to say the views of the rating agencies don't matter anymore, but unfortunately, they do," said Philippe Bodereau, head of European credit research at Pacific Investment Management, the world's largest bond investor.

"This is a setback for the banks, particularly when you consider how much progress they have made in making themselves safer and more transparent."

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