Any other business: trouble spots in European banking

‘1914: Day by Day’, the Radio 4 series by the historian Margaret MacMillan, is a gripping reminder that significant global events often arrive not in a single eruption but in a series of lesser happenings that only afterwards form an obvious pattern. Let’s hope that’s not what we’re watching in the banking sector as anticipation builds towards the results, due in October, of the European Banking Authority’s current round of ‘stress testing’. Last month’s trouble spot — with a certain resonance for the current centenary — was Austria, whose government forced losses on bondholders in the troubled Hypo Alpe-Adria-Bank by overriding a guarantee from the province of Carinthia. A clutch of other Austrian banks, all heavily exposed to eastern Europe, had their debt downgraded by Moody’s; one of them, Erste Bank, revealed it expects to lose €1.6 billion this year. Austria’s central bank chief Ewald Nowotny made matters worse by warning that the stress tests might ‘lead to exaggerations’ if too strictly applied, adding unconvincingly, ‘I don’t see any wobbly candidates.’ This month the spotlight fell on Portugal, where the second largest lender, Banco Espirito Santo, saw a run on its shares prompted by problems in its family-owned holding company. Management changes followed, but not before Portugal’s prime minister Pedro Passos Coelho felt obliged to declare that he had ‘not the slightest reason to doubt that the tranquillity of our financial and banking system will be maintained’. In response, Banco Popular of Spain pulled an issue of ‘coco’ bonds (‘coco’ being short for ‘contingent convertible’, meaning debt that converts to equity if the issuer’s Tier 1 capital ratio falls below target) because investors were demanding too high a yield. Do these ripples at opposite ends of Europe form a pattern? Not yet. But Jaime Caruana, head of the Bank for International Settlements, has just given a stern lecture about rising debt levels throughout the developed world, and let’s remember that the first warning of nasty surprises in this year’s stress tests — in February, from Davide Serra of Algebris Investments — pointed to weakness in German regional banks, at the core of the Continent’s strongest economy.