Friday, June 11, 2010

Moody’s calms Europe bank debt fears

Moody’s calms Europe bank debt fears
By Megan Murphy
Copyright The Financial Times Limited 2010
Published: June 11 2010 13:22 | Last updated: June 11 2010 13:22

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 ratings 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.

European bank stocks have fallen sharply in recent weeks on investor concern over the possible contagion effects of a worsening debt crisis in Greece as well as the credibility of the austerity programmes being put in place across the region.

A $1,000bn bail-out package agreed by European finance ministers and the International Monetary Fund last month has failed to steady markets amid doubts as to whether the Greek government would be able to enforce swingeing cuts in public sector spending.

The Moody’s report does not disclose which European banks participated in the survey. But it concludes that while those institutions are not “immune” against a wider systemic crisis, they already have adequate capital cushions to absorb losses even under “harsh” economic conditions.

“The information gathered by Moody’s reveals that banks’ cross-border exposures in Greece, Portugal, Spain and Ireland to a range of private claims, such as residential mortgages and business loans, are greater than those related to government debt,” the report says.

“Based on the severe loss assumptions made by Moody’s, a forced sale of sovereign debt at depressed market prices would have a greater, although still manageable impact when measured against banks’ capital levels.”

The average regulatory capital ratio of the banks stress tested by the ratings agency was “well above” 9 per cent, Moody’s said.

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