Bond holders hint at the real state of Europe’s banks


By David Malone

Revealing news this today – According to Frankfurter Allgemeine Credit Default swaps for many of Europe’s biggest banks shot up yesterday. And what is most interesting is which banks fared worst:  the big two in Spain, BBVA and Santander and in Germany, Commerzbank.

Why should CDS costs shoot up yesterday? Well yesterday was, as I noted in the last post, the day the European Commission was busy talking about how, in future, bond holders might be expected to share some of the losses in any default or insolvency. No sooner has the suggestion been made than bond holders might not be sacrosanct and might have to share in the actual fate and loss of the banks from whose debts they have been drawing a profit and suddenly the cost of insuring those debts shoots up. And to add to the bond holders shock and outrage, this morning in an editorial the FT itself was arguing for unmasking the false religion of holding senior bond holders as graven gods and making them pay too.

Makes you wonder if the bond holders knew all along that the banks were not as sound as they claimed but had hitherto not cared because they were confident that they were never going to share in any debacle and could therefore enjoy buying up bonds and reaping the profits from them risk free. Risk free until yesterday that is.

Overnight the banks which had seemed imperturbable, banks which the bond market and CDS traders seemed totally confident of, are all of a sudden being called in to question.

All last year I muttered darkly about BBVA, Santander and Commerzbank and looked foolish for doing so. I and others felt all could not be as well with them as they markets and bond buyers seemed to indicate they were. Despite their share prices holding up I and others were convinced these banks had to be sitting on large as yet undeclared losses. The Spanish banks from still unmarked losses on the Spanish property bubble and stupid loans to now bankrupt developers and at Commerzbank, exposure to bad loans in the East and possibly lots of American CDOs. Commerzbank has been in trouble so many times it should have an ASBO (For non Brits an ASBO is an Anti Social Behaviour Order – a kind of restraining order on persistent offenders)

Of course what has really had new doubt cast upon it, is not the banks directly, but the profitability of buying their debt. Until now the bond holders were supremely confident of being untouchable and so the bank’s debt and insuring that debt was stable. Because the debt was stable so was the share price. Now the entire confidence trick has been shaken. And suddenly there they are, the three banks whose health seemed so inexplicable, suddenly having their CDS costs pop out.

It tells me that there were indeed fundamental reasons for doubting the soundness of those banks but that as long as it was felt that the bond holders were going to be absolutely protected by their home nations then no one worried about those fundamental problems. Such problems it seemed to have been agreed were destined to be the tax payers problem.

But as soon as it is even hinted that those problems might cost the bond holders as well, the true state of concern over Europe’s big banks starts to surface. So far Santander, BBVA and Commerzbank. I wonder how long it will take before UniCredit joins them?


Related article by same author: Making the bond holders pay

David Malone is the author of the book Debt Generation. You can read and listen to excerpts from his book here: