European bank stocks skyrocketed Thursday on news that a European Union emergency summit has crafted a plan to aid Greece without any new taxes on banks.
The plan taking shape in Brussels will allow Greece to partially default on its debt while a European stabilization fund would simultaneously extend further credit to Greece, buy its bonds and recapitalize impaired banks.
The lifeline to Greece, and to banks with exposure to debt that cannot be fully repaid, buoyed European bank stocks. The STOXX Europe 600 Banks index surged 4.09%, with shares of banks with the greatest exposure to Greece more than doubling the group’s performance.
The National Bank of Greece (NBG) gained 10%, while Italy’s Intesa Sanpaolo (ISP) and Unicredit (UCG), and Germany’s Commerzbank (CRZBY) were all up more than 8 percent. At midafternoon, some of these stocks were trading higher on U.S. markets, with Commerzbank up nearly 11%.
Terms of the Greek rescue plan were not fully ironed out, but elements of the draft deal included a reduction in the interest on loans to Greece from 5.5% to 3.5% and a doubling of the repayment time to at least 15 years. A key breakthrough in the summit was a willingness to accept a “haircut” for private investors, which the European Central Bank had opposed and which U.S.-based credit agencies said would constitute a default.
By lightening Greece’s debt load and making it easier for Greece to pay through lower rates and a longer repayment term, Euro zone leaders appear to be betting that a “selective default” can be made tolerable to banks and investors exposed to Greek debt.
While investors were reassured that Europe had a solid plan in place to deal with Greek debt, it remains to be seen whether today’s stock market reaction is temporary or whether troubles in Europe’s periphery will reassert themselves.
An analysis by DoubleLine Capital released earlier this month went so far as to say that U.S. banks–not just European ones–should be of concern to U.S. asset managers. The report written by DoubleLine credit analyst Anil Lalchand argued that there is more than meets the eye to U.S. bank exposure to troubles in Europe.
That is because there is both direct counterparty exposure to debt of Europe’s economically challenged periphery, which is manageable; and there is far higher indirect exposure to French and German banks, themselves highly exposed to periphery countries.
U.S. banks are required to disclose foreign country exposure if it is greater than 0.75% of total assets. Of the five largest U.S. banks, Citibank met that threshold with 1.6% of its assets, totaling $31.1 billion, in exposure to Italy; Goldman Sachs had 0.90%, or $8.3 billion, in exposure to Ireland.
But all five large U.S. banks, also including Bank of America, JPMorgan Chase and Morgan Stanley, had far more significant exposure to Germany and France, particularly JPMorgan ($124.1 billion) and Citibank ($89.5 billion). The report noted that French and German exposure to potentially defaulting countries exceeded $1.2 trillion.