Turbulent Banking Sector

illustration: dealingroom in DNB markets oslo

(28.06.2011) The French government in cooperation with French banks has proposed a solution for voluntary roll-over of Greek debt. Markets reacted positively on this.

By Kyrre Aamdal, Senior Economist at DNB Markets

After three days of losses for U.S. stocks, new optimism came back and lifted S&P500 and DJIA 0.9 per cent despite weak economic figures. Two main factors seem to have been important. First, San Francisco Fed released a report saying most large banks now have big enough capital cushions to pass future stress test routinely. Financial stocks benefited from this.

, the French government in cooperation with French banks proposed a solution for a roll-over of Greek debt. The improvement in the U.S. stock market seems to have spread to Japan this morning with Nikkei 225 up 0.7 per cent. In line with improving stock markets, long-term government yields increased. But the 10y Treasury yield only increased 3 basis points.

The Euro has appreciated roughly 1 per cent versus the U.S. Dollar since Monday morning. EURUSD is however quite volatile and moves on news from Greece. The NOK has weakened a bit versus the Euro the last 24 hours, but still well within the trading range of 7.70-7.95 EURNOK. The EURSEK has recently increased, but has been stable the last 24 hours.
According to Reuters French government sources said under an outline deal, banks would reinvest 70 percent of the proceeds when Greek bonds fall due in 2011-14 and cash out the rest. Of the amount reinvested, 50 percent would go into the new 30-year bonds and 20 percent would go into zero-coupon AAA bonds with deferred interest. The new bonds would be placed in a Special Purpose Vehicle, effectively removing Greek debt from the balance sheets of participating banks, the source said. Banks would hold equity in the SPV instead. An option would be that the new bonds could be guaranteed by the euro zone's rescue fund (EFSF) or the European Investment Bank. The outline deal could be a template for other EU banks.
Yesterday the Greek parliament started the three-day debate on the proposed austerity package. The package has been a condition for the fifth tranche of the bail-out from EU and IMF. According to Financial Times the negotiations on the package had continued over the weekend after experts from the European Union, International Monetary Fund and European Central Bank identified yet another hole in this year’s budget, caused this time by unexpectedly high tax rebates.

Monday’s revision, the third since Greece’s finance ministry started negotiations on the four-year package in early May, reflects continued spending overruns and revenue shortfalls this year. Four deputies of the government majority basis in the parliament have threatened to vote against the austerity package. Public sector trade unions have called a 48-hour general strike starting today to protest against the austerity measures.
In the U.S. the consumer spending did not rise in May, breaking a string of 10 straight months of gains. The figures were weaker than expected. Spending was hampered by automakers that could not deliver the models Americans wanted. This again was related to delivery problems after the earthquake in Japan in March. Motor vehicle sales in May were at its lowest since September. Incomes in May rose 0.3 percent for a second month, but disposable incomes adjusted for inflation edged up just 0.1 percent. With spending weak, savings ratio rose to 5.0 per cent.