Bank Stress Tests May Be Too Lenient in Europe, Brockhouse & Cooper Says
Stress tests into whether European banks can withstand 20 percent losses on sovereign debt holdings may be too easy and lull investors into a false sense of security, according to Brockhouse & Cooper Inc. strategists.
Prices of Irish, Greek and Portuguese government bonds show investors may lose 30 percent, which isn’t reflected in the credit spreads of banks in Europe’s stronger nations, Pierre Lapointe and Alex Bellefleur wrote in a note to clients. Sovereign defaults usually cause losses of 50 percent or more, they wrote.
Spreads have widened “only in banks located in problematic countries,” the Montreal-based analysts wrote. “The German, French and U.K. banking indices have barely budged over the period. Are the banks in these countries immune to sovereign risk?”
German banks have $568.6 billion at risk in Portugal, Ireland, Spain and Greece, 22.6 percent of the total, according to the analysts. The French have $440.4 billion outstanding to those nations and the British have $431 billion, they said.
A 30 percent haircut on loans to the peripheral nations, including Spain, would imply $754 billion of losses, a third of the International Monetary Fund’s estimate of $2.28 trillion as the cost of the 2007 subprime crisis, according to the analysts.
To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net
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