In the financial City of Madrid, Banco Santander issued on Thursday its verdict regarding the much awaited euro summit, with a conciliatory message that was seen by most analysts as representative of the lukewarm reception that the banking sector in Spain has given to the accords.
“Ultimately, the European summit produced much of what the market needed, although many details remain to be explained in the coming weeks. The haircut on the Greek debt was set at 50%, which will allow Greece to reduce its public debt to 120% of GDP by 2020. A new EU-IMF funding program of €100bn was also created, and the mechanisms to monitor the implementation of reforms will be strengthened. The EFSF will be leveraged 4-5x up to approximately €1tr (through credit enhancements provided by European governments or through public or private sources such as China) and conditions shall be set by November in collaboration with the IMF. There is a clear commitment to ensure fiscal discipline and accelerate structural reforms. The summit welcomed the measures taken by Spain and the ones promised by Italy. Ireland and Portugal were encouraged to continue making progress. Measures will be improved to strengthen supervision and coordination in fiscal and economic matters, and a ten-measures package to improve governance of the euro area were proposed.”
As part of the European agreement, banks will have to meet a minimum core tier 1 ratio of 9%, an imposition that has been enforced as temporary, by June 2012. Banks will need to submitted their recapitalisation plans before the end of 2011. As for the official numbers:
“Capital requirements calculated by the EBA to achieve this are €106bn, of which French banks would need €8.8 bn, the Spanish €26.2bn (this amount is reduced to €18bn when including convertible bonds maturing in October 2012), the Germans €5.2 bn, the Greeks €30bn and the Italians €14.8bn. Capital requirements for each institution will be detailed today at a national level and at the discretion of each regulator.”
The recapitalisation, as the European Commission advanced two weeks ago, will must be done privately (national authorities will monitor it to avoid excessive deleveraging and keep a healthy flow of credit to the real economy) but, if this were not possible, government support and even help from the EFSF will be considered, too.
“If public support is needed, banks will be subject to the European Commission’s policy and, during their recapitalisation, will face restrictions on dividend payments and bonuses. The calculations made by the EBA (not defined as new stress test, since adverse macro-economic scenarios were not applied) were made based on the June 30 core capital ratios (defined in the same way as the test in July, plus capital expansions, deleveraging, restructuring and other actions conducted between June and September) of 70 banks, adding mark-to-market (September 30) of all sovereign debt, credit portfolio of public administrations (that in the Spanish case amounts to €86bn, which was the main reason for the worse than expected results of the tests.” [Santander promises not to cut back dividends.]
The fact is that we won’t know until November the final capital requirements based on data from core capital and banks’ sovereign risk exposure in 3Q11. Equally, beyond the recapitalisation of banks and as a measure to restore confidence in the financial sector, European leaders announced that they have also agreed to establish a coordinated guarantee scheme, of which there is little description, so far, as the EC, the ECB and the EIB are meant to be still working on it. The objective of this measure is to improve the situation on the primary debt market, so banks’ lending doesn’t definitely evaporates.
All in all, Santander thinks that
“Markets are likely to react favorably, especially as the heads of EU government have finally taken the measures that are perceived as necessary to limit the sovereign credit crisis. European futures reacted by rising and iTraxx indices have opened with narrowed spreads this morning.
“as the voluntary haircut prevents the execution of CDS contracts on Greece, the usefulness of sovereign CDS is questioned.”
Easy to say for a retail bank, perhaps.