Bank recapitalisations undermined by widening sovereign yields



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Michael Symonds, Credit Research
Daiwa Capital Markets Europe Limited
5 King William Street, London, EC4N 7AX

+44 (0)20 7597 8322

 

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3 November 2011

Just one week on from the conclusion of the supposed make-or-break summit the spiralling Greek crisis, together with mounting doubts over the viability of the EFSF leveraging proposals, has left euro area leaders’ grand plan to resolve the crisis in serious doubt. Sovereign bond yields, naturally, are on the move.

Meanwhile, as European banks begin reporting their third-quarter results, the predictable focus is on capitalisation following the summit decision to set out new minimum standards, identifying a preliminary capital deficit of €106bn across Europe. The final capital shortfalls – to be released later this month – will be calculated reflecting end-September balance sheets and government bond prices. But as the chart below demonstrates, sovereign yields have moved significantly since 30 September.

This fact alone means that the “mini” stress test exercise is already looking inadequate. Of course, bank recapitalisations were never going to restore confidence if the broader proposals didn’t kill off sovereign contagion, but even this most straightforward element of the grand plan is rapidly losing credibility.

Change in 10-year government bond yields (Sep.30 to Nov. 2)

Source: Bloomberg and Daiwa Capital Markets Europe Ltd.

 

Michael Symonds, Credit Analyst

 

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