European jitters won't result in return to GFC

Just as concerns about oil supply disruptions from Iraq were starting to settle, along comes a European bank scare to get markets jittery all over again.

Recently, Austria’s Erste Bank issued a profit downgrade and then the parent company of Portugal’s largest bank Banco Espirito Santo delayed a debt payment.

As a consequence, European stocks, including Erste and Paris-based BNP Paribas SA, took a tumble after Macquarie Group Ltd. downgraded the French lender.

“There is worry about contagion,” Thomas Roth, a government bond trader at Mitsubishi UFJ Securities (USA) Inc told Reuters. “The theory is that it could lead to bank failures and throw us back into recession,” he added. Nick Lawson, a London-based stock trader at Deutsche Bank AG, spoke of “the memories of 2011 coming back.”

Shane Oliver, Head of Investment Strategy and Chief Economist, AMP Capital, says it’s fair to expect that some investors will start to fret about problems at other Eurozone banks, which might require public support leading to renewed budget blowouts. “So far there is no evidence of this but the slow recovery in Europe does present risks as does the ECB’s bank stress tests this year,” says Oliver. “It’s certainly worth keeping an eye on, but several considerations suggest we won’t see a return to the dim dark days of the Eurozone crisis.”

The problems at both Europeans banks look to be partly specific to those organisations. For Erste there are issues with its Romanian and Hungarian businesses, while Espirito Santo has a troubled parent and exposure to “dodgy Angolan loans”.

Oliver says the problems at Erste and Banco Espirito Santo will remain localised as “the backstop support for Eurozone banks is now huge compared to the situation three or four years ago.” In other words the ECB has made a commitment to supply cheap funding to banks.

Oliver also argues that a correction was inevitable as the rally in Eurozone banks had arguably gotten ahead of itself.