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.
Frequently Asked Questions about this Article…
The recent jitters in European markets were triggered by a profit downgrade from Austria’s Erste Bank and a delayed debt payment by the parent company of Portugal’s largest bank, Banco Espirito Santo. These events led to concerns about potential bank failures and a possible recession.
According to Shane Oliver from AMP Capital, the issues at Erste Bank and Banco Espirito Santo are likely to remain localized. The problems are specific to these banks, with Erste facing challenges in its Romanian and Hungarian businesses and Espirito Santo dealing with a troubled parent and exposure to risky loans.
While there are concerns about the slow recovery in Europe, Shane Oliver suggests that a return to the Eurozone crisis is unlikely. The European Central Bank (ECB) has committed to providing substantial support to Eurozone banks, which reduces the risk of a widespread crisis.
The ECB has committed to supplying cheap funding to banks, which acts as a significant backstop support for Eurozone banks. This commitment is much stronger compared to the situation three or four years ago, helping to mitigate the risk of a broader financial crisis.
The banking issues led to a tumble in European stocks, including those of Erste Bank and BNP Paribas SA. The market reaction was partly due to concerns about potential contagion and the memories of past financial crises.
While there are some concerns reminiscent of the 2011 financial crisis, experts like Shane Oliver believe that the current situation is different. The ECB's strong support for banks and the localized nature of the issues at Erste and Banco Espirito Santo suggest that a repeat of the 2011 crisis is unlikely.
Erste Bank is facing challenges with its Romanian and Hungarian businesses, which have contributed to its recent profit downgrade. These issues are specific to the bank and are not indicative of a broader systemic problem.
Banco Espirito Santo delayed a debt payment due to issues with its troubled parent company and exposure to risky Angolan loans. These factors have contributed to the bank's financial difficulties.
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