City watchdog fears euro disaster

Saturday, June 5, 2010
By Paul Martin

Financial Services Authority probes banks’ exposure to the eurozone as sovereign default concerns grow

Iain Dey
TimesOnlineUK
June 6, 2010

THE City watchdog is stress-testing Britain’s biggest banks over fears they could be hit by the growing financial problems of the eurozone.

A “risk map” of Europe has been drawn up by senior officials at the Financial Services Authority, examining potential problems on a country by country basis.

Banks have been asked to model a number of disaster scenarios, including Greece defaulting on its loans. Analysts estimate that British banks have a total exposure of more than £100 billion to Greece, Portugal and Spain alone.

Disclosure of the stress tests underlines how serious financial regulators think the eurozone crisis could become.

On Friday, Hungary became the latest country to spread fear across Europe when the new government warned that its predecessor had “falsified data” about the country’s public finances.

Although Hungary is not part of the single currency, banks across Europe would be hit by any sovereign crisis. The euro slid below $1.20 for the first time since March 2006 on the news. Analysts now expect it to hit parity with the dollar.

François Fillon, the French prime minister, said on Friday that the weakening currency was “good news” because it could boost European exports. His comments accelerated the currency’s slide and prompted selling of French government bonds.

Yesterday G20 finance ministers called for governments to put their national finances in order to calm the international financial markets.

Meeting in Busan, South Korea, the ministers also stepped back from plans for a global bank tax following complaints from Canada, Australia, Brazil and India.

The meeting also concluded that new bank capital rules should be introduced gradually in an effort to ensure that lending to businesses is not curbed.

“The global economy continues to recover faster than anticipated, although at an uneven pace across countries and regions,” the G20 ministers said. “The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability, differentiated for and tailored to national circumstances.”

Concerns over Greece, Portugal and Spain have dogged the eurozone for months, dragging the euro lower and raising fears that the zone may have to be broken up.

Although a €750 billion (£620 billion) bailout fund has been set up by the European Union to cope with financial strains across the continent, markets remain on edge.

Savage austerity measures have been introduced by governments across Europe but that in turn has led to fears that the clampdown on public spending will derail the economic recovery.

Traders have begun to raise concerns about the health of other countries, including Belgium. A research note from Capital Economics, the analyst, last week warned it could become the “Greece of the north” thanks to “persisting weaknesses in the banking sector and a renewed bout of political instability”.

Fears for Ireland’s financial stability also re-emerged after the minister of finance said that the country’s banks had to refinance more than €74 billion of debt by October 1. The sum is equivalent to more than half Ireland’s annual economic output.

Stock markets also closed down on Friday, hit by weaker than expected American jobs data.

The G20’s communique was intended to calm market nerves, emphasising that governments understand the need to tighten their belts but will try to do so without restricting growth.

George Osborne, the chancellor, said the meeting had rubber-stamped the coalition government’s approach to the public finances.

“I think we’ve achieved a significant success by getting the endorsement of the G20 for the fiscal position we adopted just three weeks ago,” he said.

Plans for additional bank regulation would be introduced gradually, the ministers said, to help ensure that new capital requirements would not damage the recovery.

The finance ministers backed away from a global bank tax, but they agreed that the financial sector should make a “fair and substantial contribution” towards any future government bailouts of the industry.

Osborne is expected to announce a new tax on British banks, and additional restrictions on City pay, in his emergency budget on June 22.

n Four members of the shadow monetary policy committee (MPC) believe that the Bank of England should raise interest rates at its next meeting, in response to inflation concerns.

However, the shadow MPC, which meets under the auspices of the Institute of Economic Affairs, voted five to four to hold rates at 0.5%.

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