Hot stuff in European banks’ exposure

Posted by John McDermott on Jun 21 19:18. Comment | Share

Fitch was doing its best on Tuesday to not fall down dizzy while circling around the possible ways to separate Greek banks from the sovereign.The logic is tortuous but at least Fitch is trying to provide fair warning. More…

Fitch was doing its best on Tuesday to not fall down dizzy while circling around the possible ways to separate Greek banks from the sovereign.

The logic is tortuous but at least Fitch is trying to provide fair warning. From a press release accompanying its latest report on European bank exposure to Greece, published Tuesday.

“A restructuring or rollover of Greek government debt would not automatically trigger a default by the major Greek banks,” says Cristina Torrella, Senior Director in Fitch’s Financial Institutions group. “The precise rating actions on the banks will depend on the full terms of the sovereign event and the extent to which this considers maintaining solvency and, vitally, liquidity in the Greek banking system,” Ms Torrella added.

Which leaves the Greek banks, as we’ve noted before, all but hostage to ECB collateral requirements. And it reads a bit like Fitch is now hostage to these requirements, too.

The most crucial immediate consideration for Fitch’s bank ratings would be whether a mechanism would remain for ensuring that central bank liquidity continues to be provided to the Greek banks. The most straightforward way to do this would be continuing availability of sufficient collateral eligible for discount with the European Central Bank (ECB).

However, the ECB has suggested that some forms of restructuring or rollover would not be acceptable in this respect. At a press conference on 9 June, Jean-Claude Trichet, President of the ECB stated: “We call for the avoidance of any credit events and selective defaults or default…we will apply our rules and our framework as regards both the soundness of our counterparties [the banks] and the quality of the collateral that we take in our refinancing operations.”

As long as the terms of a restructuring or rollover are acceptable to the ECB, it seems logical that they will continue to accept restructured or rolled over Greek government bonds or government-guaranteed bonds as collateral for discounting, provided the banks pledging the collateral are solvent.

So, as long as the Greek sovereign can be separated from its bonds, and as long as the ECB continues to accept them, which it will so long as Fitch doesn’t cut them to D, everything is just about all right. Clear? Thought so.

Fitch’s report looks at European bank exposure to the sovereign debt of Greece, Ireland and Portugal. We’ve touched on all this before so we won’t repeat ourselves, but these heatmaps may come in handy if you’re staying up late tonight to watch what happens in Athens.

Greece exposure:

Ireland exposure:

Portugal exposure:

Meanwhile, in a busy day, Fitch also published a report on US money market fund exposure to European banks.

Never say never, but the fact that European banks account for roughly 50 per cent of total MMF assets tells us more about US interest rates than it does about another buck-breaking experience. Assuming of course that the dreaded second order effects do not occur. From Fitch’s European bank report:

While European bank exposures to these risks are not material enough to represent a significant direct source of credit loss risk, the contagion effect would be likely to trigger broader risk aversion and cause liquidity to contract sharply in the critical money and capital markets. After Ireland and Portugal, countries like Spain and Italy would see most pressure. This would be of particular concern for the medium‐ sized and smaller Spanish banks that have been weakened by the domestic real‐ estate crisis and that are struggling to de‐risk, deleverage and refinance. Fitch believes that the recent increase in utilisation of ECB funding by Spanish banking sector (up to EUR57bn at end‐May 2011 from a EUR42bn low in March, albeit still well down on the EUR139bn peak reported in July 2010) is largely due to higher utilisation by medium‐sized Spanish banks

Full report in the usual place.

See here for coverage of the Greek confidence vote, scheduled for around midnight London time.

Related links:
+++Vienna Plus+++ – FT Alphaville
Top of the Greek bond exposure pops [updated] – FT Alphaville

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