Germany Overtakes Spain in Debt Wagers Amid Crisis
Comment of the Day

September 16 2011

Commentary by Eoin Treacy

Germany Overtakes Spain in Debt Wagers Amid Crisis

This article by Abigail Moses for Bloomberg may be of interest to subscribers. Here is a section:
German banks have about 9 percent of the 98.2 billion euros ($136 billion) of Greek sovereign bonds held by the 90 lenders that took part in the stress tests run this year by the European Banking Authority and published in July. French lenders have about 8 percent of the aggregate amount under the EBA tests and top the list of Greek creditors overall, with $56.7 billion of private and public debt, according to a June report by the Basel, Switzerland-based Bank for International Settlements.

Moody's Investors Service cut its credit ratings on Credit Agricole SA and Societe Generale SA this week and kept its biggest lender, BNP Paribas SA, on review for a possible downgrade because of the risks posed by their investments in Greece.

"The focus is shifting and people are trading more on core names," said Simon Ballard, a credit strategist at RBC Capital Markets in London. "It's just a reflection of the fiscal pressure at the core to continuing the life support system for periphery."

Eoin Treacy's view In the UK, companies which benefit from market volatility such as ICAP, Tullett Prebon and IG Index have been among some of the better relative performers. However on mainland Europe bearish focus has centred on banks holding large amounts of peripheral debt. The Dow Jones Euro Stoxx Banks Index is currently 64% overextended relative to its 200-day MA which is an oversold reading by just about any measure. The question remains whether it is likely to become even more overextended.

Since 2008, no European bank or sovereign has been allowed to declare bankruptcy because of the knock-on effect that would have on the holders of their debt primarily in France, Germany and to an extent the UK. That policy does not appear to have changed. Attention has focused on whether Greece is going to default. 2-year yields hit a peak on Wednesday of 84.5% but have since contracted to 49% reflecting perceptions that today's EcoFin meeting and discussions over the weekend will lessen the potential for Greece to leave the Euro. Even in a worst case scenario, a Greek bankruptcy does not necessarily imply a bankruptcy by a French or German bank. These two respective governments are comparatively well placed to recapitalise their banking sectors if the need arises.

I thought it might be instructive to review some of the hardest hit French and German banks:

SocGen dropped from €50 to €15 in the last six months. It found short-term support on Tuesday, forming an upside key reversal and has followed through somewhat. It will need to hold above €25 to break the progression of lower rally highs and suggest a medium-term low is being formed.

BNP Paribas also formed an upside key reversal on Tuesday and rallied emphatically yesterday. A sustained move above €35 will be required to break the progression of lower rally highs and question the downtrend.

Credit Agricole also found short-term support earlier this week but today's downward dynamic is not encouraging. A sustained move above €20 will be needed to break the progression of lower rally highs.

Natixis said in May that it had no exposure to Greek debt. Nevertheless it has not been spared a similar decline to the above banks. The share has rallied to test the progression of lower rally highs but a sustained move above €2.50 will be required to signal more than a short-term low has been reached.

The number of listed German banks has decreased considerably over the last decade. Hypo Real Estate has been nationalised. As far as I know all of the Landesbanks have delisted. This leaves Deutsche Bank, Deutsche Postbank, Commerzbank and Aareal Bank.

Commerzbank remains in a consistent downtrend. It found short-term support near €1.50 on Tuesday and bounced rather well. A sustained move above €2 would break the 7-month progression of lower rally highs and suggest that more than a short-term low has been found. Aareal Bank has a similar pattern.

Deutsche Postbank is relatively thinly traded. It found at least short-term support in the region of the December low near €20 this week and bounced. A sustained move below that level would be required to reassert the downtrend.

Deutsche Bank hit a low on Monday near €20 and posted its largest rally since at least April. Potential for an additional short covering rally has increased but it will have to hold above the recent low on a pullback to suggest demand is beginning to return to dominance. The share's stronger performance this week probably reflects the strength of its global franchise relative to the other shares profiled above.

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