October 2, 2022

European Markets Stumble on Worries of Debt Crisis Contagion

LONDON — Stocks fell more than 1 percent Monday in Europe in the wake of the publication late Friday of the results of stress tests on European banks. The euro weakened and the bond yields of indebted nations climbed as investors worried about the degree of political will to overcome the region’s debt crisis.

On Wall Street, however, stocks were down less than 1 percent at the opening, with the Dow Jones industrial average off 94.08 points to 12,386.26 and the Standard Poor’s 500-stock index losing 7.34, to 1,308.80.

In Europe, the market jitters marked the start of an important week for the European Union as its leaders attempt to stem full-blown market contagion.

The leaders will hold a special summit meeting Thursday, but there appears to be no agreement yet over the terms of a second bailout for Greece, especially on the nature of a private sector contribution.

The lack of clarity along with recent investor sales of Italian and Spanish bonds have led analysts to become increasingly pessimistic.

“The euro zone crisis has recently worsened significantly, exacerbated by disagreements between the E.U.’s key politicians,” said Ruth Lea, an economic adviser to the Arbuthnot Banking Group in London. “It is becoming increasingly clear that there will have to be major steps towards fiscal union or the euro zone will begin to disintegrate.”

She added that the “debt crisis can fairly be described as having morphed into a political crisis.”

Further complicating the latest Greek rescue, the European Central Bank’s president, Jean-Claude Trichet, reiterated during an interview with The Financial Times Deutschland published Monday that the E.C.B. would not accept bonds from any defaulting country as collateral. That could leave Greek banks without financing if credit agencies deem a restructuring, even a voluntary one, to be a default.

The Euro Stoxx 50, a benchmark index of blue chips stocks in the region was down 1.28 percent in late afternoon trading, and the CAC 40 in Paris lost 1.38 percent. The euro weakened to $1.4052 from $1.4157 late Friday.

Perceived as a haven, the Swiss franc surged to a record high against both the euro and the dollar Monday. The euro declined to 1.14848 francs and the dollar dropped to 0.8177 francs. The price of gold for August delivery also touched a new nominal high, rising above $1,600 a troy ounce, as investors sought safer assets.

Further clouding the picture were the stress tests carried out by regulators on the region’s banks. The results were released after markets closed Friday. The threshold to pass the test was set at a core Tier 1 capital ratio, which encompasses safe assets, at 5 percent.

Of the 90 banks, eight failed, with an aggregate capital shortfall 2.5 billion euros. But the exercise left unanswered many questions about how many healthier lenders would survive a deepening of the debt crisis, given their exposure to Greek, Italian and Spanish bonds. A sovereign default case was excluded from the tests.

Eleonore Lamberty, a credit analyst at ING, said the pass mark of 5 percent was too low in view of the future capital requirements that banks would require under the so-called Basel accords.

“Once more the capital shortfall and the number of banks which failed seems, like last year, on the low side, especially the number of Greek banks,” she wrote in a research note. She added that a 50 percent write-down on Greek sovereign debt “would practically wipe out the regulatory capital bases of all Greek banks.”

She recommended “caution” toward banks which passed with a core Tier 1 result below 6 percent, which covers 16 banks; those with an outcome below 7 percent came to an additional 17 banks.

She also said that “certain national champions” did not perform very well, notably Société Générale of France, Deutsche Bank of Germany, UniCredit of Italy and Royal Bank of Scotland.

Shares in Société Générale were down 4.3 percent at midafternoon and Commerzbank of Germany had slid 4.2 percent.

Meantime, yields on riskier Italian 10-year bonds pushed higher — up 0.23 percentage point, at 5.975 percent, — alongside rising yields on Spanish, Portuguese and Greek equivalents.

Last week, Italy accelerated a deficit-cutting plan, aware that investors had been selling its debt fearing it might need outside support.

Investors also remained wary about events in the United States, where President Barack Obama is trying to get lawmakers to agree to a deficit-reducing package before an Aug. 2 deadline for increasing the debt ceiling.

Article source: http://feeds.nytimes.com/click.phdo?i=ea5b7e4d71b574cb9cbd0a624532c306

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