Bailout fears loom over European banks

Fears over liquidity and sovereign debt contagion mean the threat of nationalisation has spread to leading players in Europe’s banking sector.

The world’s central banks joined forces to provide extra dollar liquidity to the market last week in an attempt to ease pressures on European banks. Eurozone financials saw significant share price falls in September amid increased fears over their funding requirements.

IMF head Christine Lagarde said European banks need mandatory and urgent recapitalisation, “seeking private resources first, but using public funds if necessary”.

European politicians dismissed the suggestion, pointing to the results of the summer’s stress tests, but shares in Société Générale and other French banks have fallen as much as 25% since Lagarde’s speech and remained about 15% lower last week.

Moody’s downgraded SocGen and Crédit Agricole, and kept BNP Paribas on negative outlook. Both BNP and SocGen also announced asset disposal plans and issued statements defending their liquidity positions.

Managers expect to see capital raisings as the pressure on the sector intensifies.
“We need to see structural adjustment as opposed to short-term patching. I do not exclude nationalisation of the banks in Europe”, said Schroders head of global equities Virginie Maisonneuve.

Nigel Bolton, manager of the €1.3bn BlackRock European Focus fund and co-manager of the €2.5bn European fund, added: “The market is increasingly putting pressure on financials and politicians to come up with more permanent solutions.

“There are some banks out there in need of more capital, and a lot is happening at the moment behind the scenes. Things will become clearer over the next month or two.”

Henderson head of fixed income John Pattullo suggested a widespread recapitalisation could take place in conjunction with a Greek default. “Europe needs to get ahead of the curve somehow. People in markets are in despair at the inability of policymakers,” he said.

Guy de Blonay, manager of the £696m Jupiter Financial Opportunities fund, said any market rally would depend on a fresh round of capital raisings by European banks.

“The market is waiting for government action, for G20 leadership, and for the banks to raise capital. European banks will need to raise money and markets are waiting for that capital race to happen again.”

Pattullo said France will move to shore up its banking sector even if that means jeopardising its AAA-rating, noting the nation has historically been fiercely supportive of major national industries.

“Someone has to take a hit somewhere, and that someone is taxpayers, whether you dress it up as further contributions to the EFSF, equity injections or something else,” he said.

Other countries’ banks are in an increasingly precarious situation. Italian financials have taken their share of the pain from the recent sell-offs,  with shares in UniCredit dropping  as much as 25% since the start of the month as Italy’s fiscal position comes under renewed focus. Moody’s was reviewing Italy’s credit rating at the time of writing.

De Blonay said:  “It will be very difficult to find a solution to the current situation”, adding share prices may have further to fall.

“When you consider sovereign risk issues and global growth prospects, what looks cheap is perhaps not that cheap,” he said. “We are not excited about the prospect of buying back into European banks.”