European bank stocks jumped after leaders agreed to bolster lenders’ capital and boost the region’s rescue fund in a bid to stem the debt crisis.
France’s Societe Generale SA, Credit Agricole SA and Britain’s Barclays Plc led the 46-member Bloomberg Europe Banks and Financial Services Index 8.8 percent higher in London. Societe Generale jumped 23 percent and Credit Agricole 22 percent. Barclays climbed 18 percent, BNP Paribas SA 17 percent and Deutsche Bank AG, Germany’s largest lender, 16 percent.
“The details are important, but the fact that 17 euro leaders with all their different agendas managed to reach a deal is encouraging,” said Dirk Becker, a banking analyst at Kepler Capital Markets in Frankfurt. “It might seem chaotic, but in the end the Europeans can find a solution, and if not they’ll keep trying.”
European leaders agreed to boost the firepower of the region’s rescue fund to 1 trillion euros ($1.4 trillion) and persuaded bondholders to accept a 50 percent loss on their holdings of Greek government debt. Banks will, as part of the plan, need to raise capital to insulate themselves against losses on government debt. Still to be decided are the details of the haircut, what assets banks can count as capital, how banks will raise it, and whether future bank debt is backed by a national or European guarantee.
‘Bumpy Road Ahead’
“The rally is more a reflection of the fact that expectations were very low,” Philippe Bodereau, head of credit research at Pacific Investment Management Co., said in a telephone interview. “This has to be seen as an incremental positive but it is hardly ‘shock and awe,’’ he said. ‘‘There will be a bumpy road ahead.’’
The world’s biggest banks bowed to what German Chancellor Angela Merkel called the ‘‘last word,’’ agreeing to write down their Greek government debt by half in the pivotal piece of the euro area’s bid to stem the financial crisis. The Institute of International Finance, which represents 450 financial firms, agreed to ‘‘develop a concrete voluntary agreement’’ on a 50 percent haircut on Greek debt, Managing Director Charles Dallara said in a statement e-mailed at 4:26 a.m. in Brussels.
Euro-area leaders who called Dallara into a meeting at about midnight, forcing a break in their 10-hour summit, said that while the bond transaction will be voluntary, the decision resulted from an offer he couldn’t refuse.
‘Ruined the Banks’
‘‘It was the fiercely delivered wish by Merkel, Sarkozy, Juncker, that if a voluntary agreement with the banks was not possible, we wouldn’t resist one second to move toward a scenario of the total insolvency of Greece,” Luxembourg Prime Minister Jean-Claude Juncker told reporters. That “would have cost states a lot of money and would have ruined the banks.”
Josef Ackermann, chief executive officer of Deutsche Bank and chair of the Institute of International Finance, said today Greek bondholders and policy makers reached “a satisfying compromise” in their efforts to rescue the country.
Banks including Royal Bank of Scotland Group Plc and Deutsche Bank have already written down their holdings of Greek debt to market value.
“Both sides moved towards one another and reached a satisfying compromise in the interest of Europe,” Ackermann said today in comments confirmed by Armin Niedermeier, a spokesman for Frankfurt-based Deutsche Bank.
Europe’s banks will need to raise 106 billion euros in fresh capital under tougher rules being introduced in response to the crisis. Banks will need to have core Tier 1 capital equal to at least 9 percent of assets after writedowns on sovereign debt, the European Banking Authority said yesterday.
Greek banks will need to raise 30 billion euros of additional capital, Spanish banks 26.2 billion euros, Italian lenders 14.8 billion euros, French firms 8.8 billion euros and German banks 5.2 billion euros, the EBA said. The lenders have until Dec. 25 to submit their plans for raising the money to national supervisors.
Societe Generale, France’s second-largest bank, said it will meet the additional capital rules from its own resources, and won’t need state said. Deutsche Bank said this week it can raise its capital level to more than 9 percent by June without additional measures beyond those already announced.
“The recapitalizing of Europe’s banks will not in itself solve the sovereign debt crisis,” said Simon Lewis, CEO of the Association for Financial Markets in Europe lobby group. “However, this plan is set within a timeframe that should enable them to determine how best to strengthen their capital positions in ways that treat all stakeholders fairly.”
The European Financial Stability Facility, established last year to sell bonds to finance loans for distressed euro nations, has since also gained the authority to buy sovereign bonds on the secondary and primary markets, offer credit lines to governments and recapitalize banks as the Greek crisis worsened.
“We’re in a much better position than we were 24 hours ago, but there is still a big question over just how they intend to leverage the rescue fund up to one trillion, and how the banks are supposed to get to this 106 billion euros,” said Mike Trippitt, an analyst at Oriel Securities Ltd. in London.
Some banks may need to limit lending to reach the 9 percent core Tier 1 capital level which could exacerbate the economic slowdown, the Centre for Economics & Business Research Ltd. said today. If governments don’t come up with some new money, Asian and Middle East investors will probably end up owning the bulk of the European banking system, the London-based research company said.