Fear of default by European banks drags stocks

The European stock markets recorded heavy losses due to a rebound in fears about the financial health of European banks, whose shares suffered sharp falls. Global markets were hit hard earlier this month by the bankruptcy of three regional financial institutions in the United States, including Silicon Valley Bank.

The wave of stock losses forced Swiss authorities last weekend to frame a purchase of Credit Suisse for rival UBS to reassure investors after a week of turmoil.

But this Friday the European markets opened with losses and accentuated the trend during the operation. The Paris stock market lost 2.15%, London 1.87%, Frankfurt 2.15%, Milan 2.46% around 10:40 GMT. In Madrid, the Ibex-35 operated with losses of 2.9%.

The banking sector of the expanded Stoxx Europe 600 index fell by 4.7%, after a sharp increase in the cost of insurance against the risk of default (CDS) of several European banks.

The action of the main German bank Deutsche Bank sank more 12.43% and its rival Commerzbank registered losses of 8.99%.

The oscillation of the CDS, a derivative associated with credit risk, is attracting attention.

Insurance

In the case of Deutsche Bank, the insurance that covers its debt indicates a probability of default of 27.4% in the next five years. For Commerzbank this is 19.3%, according to Bloomberg.

In Paris, shares of the Société Générale bank fell 7.46% and shares of BNP Paribas lost 6.40%. In London, Barclays lost 5.94% and HSBC 4.01%.

Who will be the next?

“The fear of contagion” in the banking sector “is still not going away,” said Neil Wilson, an analyst at Finalto.

“The crisis will end when investors stop asking themselves: who will be next?” the expert said.

In the United States, the Federal Reserve maintained its restrictive monetary policy this week with an increase, albeit modest, in rates.

The European Central Bank (ECB) and issuers in the United Kingdom, Switzerland and Norway maintained the same trend, in a context of concern about inflation. “The massive sale of bank assets has resumed, which shows the fragility of confidence in the sector,” Fiona Cincotta, an analyst at City Index, told AFP.

“As central banks have continued to raise interest rates this week, the outlook is looking increasingly bleak,” he said.

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Wall Street closed higher on investor confidence after Fed Chair Janet Yellen said the authorities are willing to take additional measures if necessary to prevent contagion in the financial sector.

In Asia, the markets closed in red this Friday and Hong Kong lost 0.67%, Shanghai 0.64% and Tokyo 0.13%. The price of oil was also trading lower, an indication that investors fear a recession.

On the other hand, in a speech before European leaders, gathered for a summit in Brussels, the president of the European Central Bank, Christine Lagarde, assured that the banking sector is “resilient”, according to an EU official.

“The euro area banking sector is resilient, because it has strong capital and liquidity positions,” Lagarde said, according to that source.

In turn, the head of the German government, Olaf Scholz, assured that there was no reason to worry about the solidity of Deutsche Bank.

“Deutsche Bank has modernized and organized its way of working. It is a very profitable bank. There is no reason to worry,” Scholz said at the end of the summit, which, on its second day, included a discussion on the situation of the banking sector.

Scholz stressed that the advantages of “having had strict rules and regulation for several years now are being seen. The banking system is stable in Europe.”

For his part, French President Emmanuel Macron said that “the fundamentals of European banks are solid. The euro area is the region where banks are strongest.”

Lagarde reiterated that the ECB is “fully prepared to provide liquidity to the euro area financial system, if necessary.”