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DealBook: Once Bailed Out, Commerzbank Again Raises Doubts

8:41 p.m. | Updated

FRANKFURT — The cloud of dread hanging over European banks darkened after reports that Commerzbank could be on the verge of another government bailout.

Like many of the region’s financial firms, Commerzbank — the second-largest German lender behind Deutsche Bank — is under pressure from regulators to increase its capital buffer. This month, the European Banking Authority said the firm had to raise an additional 5.3 billion euros, or $6.9 billion, by the middle of 2012.

But analysts and others are worried that Commerzbank will not be able to come up with the funds, which amount to roughly 80 percent of the firm’s market value. In the current turmoil, investors are loath to risk more money on the sector.

With a substantial sum to raise, speculation has swirled that Commerzbank was in advance talks with the German Finance Ministry about a rescue plan.

“The banking system is extremely fragile,” Nicolas Véron, a senior fellow at Bruegel, a research institute in Brussels. “Whether it will result in spectacular events like collapses or nationalizations is difficult to say. I would not rule anything out.”

Commerzbank has denied the reports, saying it is determined to avoid taking more government aid. The firm, based in Frankfurt, is already 25 percent owned by the German government as a result of a rescue in 2009.

Although the German Finance Ministry issued a statement that played down prospects for a bailout of Commerzbank, the government stopped short of a denial.

“As a shareholder of Commerzbank, the government is in regular contact,” the ministry said. “However, this does not go beyond an exchange of information.”

The situation illustrates the quandary facing European financial firms and policymakers.

As the sovereign debt crisis drags on, regulators are pressing banks to increase their capital cushion, part of a broader effort to restore faith in the financial markets. But industry executives complain that the only way to increase their reserves is to sell assets at rock-bottom prices and curtail lending, amplifying an economic slowdown already under way in the euro zone.

“If the capitalization level of large banks is too low you have to repair that — whether you like it or not — to restore market confidence,” said Harald A. Benink, a professor of banking and finance at Tilburg University in the Netherlands. But he added, “It is difficult for banks to go to markets in this environment. The governments will have to step in.”

Banks have to raise a hefty amount.

Last week, the European Banking Authority said that institutions should raise 115 billion euros in new capital by the end of June. Banco Santander in Madrid needs 15.3 billion euros; UniCredit has to come up with 8 billion euros.

While Germany has one of the strongest economies in Europe, its banking system remains especially vulnerable. Of the 13 big German banks examined by the banking authority last week, six needed additional capital. Deutsche Bank must raise 3.2 billion euros.

The industry’s options are limited.

A number of European banks have announced plans to sell assets to maintain a sizable capital cushion. According to the advisory firm Deloitte, the region’s firms currently hold $2.2 trillion in noncore and nonperforming assets, much of which could be offloaded. Even before the banking authority published the new requirements, Commerzbank had said it would temporarily halt some international lending and sell core assets.

But suitors are largely sitting on the sidelines, fearful that asset prices will continue to fall. Moody’s Investors Service this week warned that the banks could have a hard time finding buyers.

Investors are also largely unwilling to plow more money into the European banks. Many have watched the value of their holdings erode since the start of the sovereign debt crisis.

In recent weeks, some financial firms have been shuffling their bonds in a bid to bolster reserves. Commerzbank has offered to buy $800 million of hybrid securities at a discount — a complex move that will allow it to increase its capital levels without raising additional funds.

But such maneuvers have done little to ease investors’ fears.

On a day when the main European stock indexes were mixed, Commerzbank shares fell almost 4 percent Tuesday. The stock has plunged around 75 percent since March.

Jack Ewing reported from Frankfurt and Liz Alderman from Paris. Raphael Minder contributed reporting from Madrid.

Article source: http://feeds.nytimes.com/click.phdo?i=dd87f0bd67747773f280bcec93d09130

Greek and Cyprus Credit Ratings Cut in Latest E.U. Downgrade

LONDON — In the latest downgrades to hit the euro zone, Greece had its credit rating cut by Standard Poor’s on Wednesday, while Moody’s Investors Service cut the rating for Cyprus.

S.P.’s rating for Greece, already in junk territory, was reduced two notches to CC with a negative outlook. In a statement, S.P. said that the proposed restructuring of Greek government debt as part of a second bailout was a selective default — a prospect ratings agencies had warned about when the plan was being discussed.

S.P. also said that despite the new aid package agreed on last week, there was still a good chance that Greece would default on its debt.

Under the second bailout, banks and other private investors are to contribute about €50 billion, or $72 billion, by swapping their existing debt for new bonds..

“Standard Poor’s has concluded that the proposed restructuring of Greek government debt would amount to a selective default under our rating methodology,” the agency said. “We view the proposed restructuring as a ‘distressed exchange’ because, based on public statements by European policymakers, it is likely to result in losses for commercial creditors.”

Moody’s cut Cyprus’s long-term government bond rating two levels to Baa1 — still an investment grade — from A2. It assigned a negative outlook, signaling the next move may be another downgrade, and cut its short-term ratings.

An explosion at a naval base this month badly damaged the Vasilikos power plant. That has caused outages, and Moody’s said that the shortage is likely to hurt the economy, which it now expects to stagnate this year, and expand only 1 percent next year.

Moody’s also cited the “increasingly fractious domestic political climate” and “the material risk that at least some Cypriot banks will require state support over the medium term as a result of their exposure to Greece.”

Cyprus bonds fell on Wednesday and Italian and Spanish bonds dropped as investors became increasingly concerned whether a package assembled by European leaders to help Greece’s troubled finances and restore confidence in the euro zone would be enough. The yield on Cyprus’s 10-year bond rose 0.13 percentage points to 10.043 percent.

Banks in Cyprus continue to hold “substantial” Greek debt and would be affected in the case of a sovereign debt default, Moody’s said.

Moody’s also said it was concerned about the large role the banking sector plays in the Cypriot economy. Bank assets amount to about 600 percent of gross domestic product in Cyprus, excluding foreign bank subsidiaries, it said.

The July 11 explosion that destroyed the plant and killed 13 people also rattled the government. Costas Papacostas, the defense minister, and Petros Tsalikidis, chief of the national guard, resigned amid criticism about failing to take steps that could have prevented the accident. Some 98 gunpowder containers were left stacked for more than two years in an open field near the power station.

The political friction might make it harder for the center-left government, which does not have an absolute majority in Parliament, to push through spending cuts and privatizations announced on July 1.

“This adverse development increases implementation risk to the government’s plans, many of which will require not just cross-party support but also acceptance by the trade unions,” Moody’s said.

On Tuesday, a number of parties accused the government of backtracking because they feared an angry backlash from Cyprus’s powerful labor unions, Reuters reported from Nicosia.

Cyprus, which adopted the euro on Jan. 1, 2008, is seeking to bring down a budget deficit that hit 5.3 percent of gross domestic product last year.

“The Cypriot banks have been considered safer than the Greek banks and have received a lot of the deposit outflow from Greece,” Panicos Demetriades, a professor at the University of Leicester, said, adding that the banks have large businesses in Russia. “However, the problem is that a small country like Cyprus cannot afford to support such a large banking system, if it gets into trouble.”

Article source: http://www.nytimes.com/2011/07/28/business/global/moodys-downgrades-cyprus-over-economic-woes.html?partner=rss&emc=rss

DealBook: Once Bailed Out, Commerzbank Again Raises Doubts

Greek and Cyprus Credit Ratings Cut in Latest E.U. Downgrade

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