Greek, Spanish Bank CDS Among Biggest Movers After Stress Tests

    By Katy Burne    Of DOW JONES NEWSWIRES  

NEW YORK (Dow Jones)--Credit default swaps on Greek and Spanish financial institutions were among the biggest movers after the Committee of European Banking Supervisors released euro-area bank stress-test results at noon EDT.

The cost to insure debt from the National Bank of Greece using CDS fell 11% from Thursday's levels to 758 basis points, equivalent to $758,000 per year to cover $10 million of debt for five years. CDS on Greece's third-largest bank, EFG Eurobank Ergasias, fell 13% to 755 basis points. And CDS on Banco Popolare Societa Cooperativa and Banco de Sabadell fell 8% and 7% to 277 and 272 basis points, respectively.

Elsewhere, CDS were largely unshaken by the results.

"There had been so many leaks that people expected the majority of banks to pass, and the ones that didn't--the Spanish cajas and Hypo Real Estate Holding--you know they will get help," said Gary Jenkins, head of fixed-income research at Evolution Securities in London. "There is a difference between failing a stress test and being allowed to fail. No European government is going to replicate the Lehman [Brothers] experiment any time soon."

The cost to insure Greek debt against non-payment or default using CDS fell 1.55% from Thursday's levels to 749.3 basis points, according to Markit data, equivalent to $749,300 a year to cover $10 million. CDS on Portugal were 8.22% cheaper, Italy's were 4.82% cheaper, and Ireland's fell 2.48%%. By contrast, Spain's were roughly flat and CDS on Germany rose 2.45% after one of its banks failed the test.

All five Italian banks passed, as did all the Portuguese and listed Spanish banks. Overall, seven EU banks failed the worse-case scenario, whereby their Tier 1 capital ratio fell below the threshold of 6% in the simulated conditions generating an overall shortfall of EUR3.5 billion. Some 38 of the 91 banks tested are reliant on government support.

"Spain had a very successful [bond] auction and a lot of those problems went away. And with the sovereigns coming back, there is a lot less pressure on the banks," said Jenkins.

The iTraxx Europe Senior Financials index--a key barometer of financial institutions' health in the region--was trading around 132 basis points before the results, 1.5% better than Thursday's close, but after the results it deteriorated marginally to 133.8 basis points.

The tests simulated the resilience of 91 European financial institutions to shocks in the value of their sovereign bond holdings, rises in interest rates and a prolonged recession. Only haircuts on sovereign debt in the observed banks' trading books counted, because assets held on firms' bank books were assumed to be held until maturity and not sold off if prices dipped. Hedges via CDS weren't factored into aggregate exposures.

As of the end of March this year, the aggregate sovereign debt exposure of the observed banks was EUR58.2 billion, the CEBS said. Sellers of CDS protection on European sovereign bonds would need to pay $135.5 billion to protect buyers upon a credit event, according to recent Depository Trust & Clearing Corp. figures, excluding Malta, Cyprus and Luxembourg.

Market participants pointed to the lack of transparency in the European tests by comparison with the U.S. tests in 2009.

That protectionism led some to believe the tests might not be as stringent as they could have been.

"The big difference between this test and the U.S. test was you get the added complication of testing in 20 countries and national interests," said Ivan Zubo, a banking analyst at BNP Paribas in London. "In Europe, countries are being very defensive about their banks. So the risk was much more about not enough banks failing."

Charles Mounts, global financials strategist at Knight Capital and a former bank examiner at the New York Federal Reserve Bank, said investors will take a while to digest the news.

"The success of the stress tests is not going to be measured by what the capital deficiency number is per se. It will be, 'Does it help restore confidence in the EU banking sector?' which may, by extension, restore confidence in the more stressed European sovereign stories. That won't be immediate," he said.

Based on current CDS prices and assumed recovery levels, the probability of a Greek default is 48.41%, Portugal's

๑۩۞۩๑๑۩۞۩๑๑۩۞۩๑๑۩۞۩๑๑۩۞۩๑

Sphere: Related Content