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Moody's Downgrade Expectations, Euro Fears Fuel Bank Credit Underperformance

05/09/2012 | 08:43am US/Eastern
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-- Italian, French, Spanish banks under pressure

-- Sovereign, sector-specific concerns sum with wait for Moody's axe

-- Some concerned downgrades would be worse than expected given troubled environment

By Serena Ruffoni

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While the spectre of a downgrade of European banks by Moody's Investors Service Inc. looms, French, Italian and Spanish bank bonds, and the cost of insuring their debt against default, are underperforming in a weak market Wednesday.

The iTraxx Europe Senior Financial index, measuring the cost of insuring senior debt of 25 European banks and insurers and widely used as a gauge of investors sentiment towards the sector, is 15 basis points wider Wednesday at 272 basis points, as the resurgence of fears around the European debt crisis marks the end of a LTRO-induced quarter-long bullish stance.

"French banks are some 10 basis points weaker, Italian and Spanish 10 to 20 basis point, generally." said a cash bond trader.

Italian banks were under pressure, as they are the first in line to bear Moody's axe. The ratings firm, in updating its timetable for a review of Western European banks, said the next rating actions are expected to occur in "early May", starting with Italian and then Spanish banks.

"Everybody did their own calculations on if, and how much major Italian banks would be downgraded" said a second trader "And although this is priced in, there is a risk that the final outcome would be worse than expected, with further downward pressure."

Credit default swaps on Intesa Sanpaolo rose 19 basis points to 469 basis points, UniCredit was 15 basis points wider at 486 basis points, while Monte dei Paschi di Siena, which has less liquidity than the previous two, rose 27 basis points to 563 basis points after a visit by Italian tax police to its headquarters Wednesday morning.

The investigation, as reported by Dow Jones Newswires, is about its takeover of Italian rival Antonveneta, occurred in 2007.

Spanish banks were also weak, the second trader said, as the threat of a ratings downgrade comes at time when concerns over Spain's over inflated real estate lendings have yet to be resolved. Bankia is set to receive state financial aid and be recapitalized, and the government is stepping up its efforts to clean up the banking system of billions of troubled real-estate loans.

Banco Santander was 18 basis points wider at 412 basis points, while Banco Bilbao Vizcaya Argentaria was 21 basis points wider at 444.

Nervousness about the next steps of newly elected centre-left president Francois Hollande is also hitting French banks, of which CDS are significantly wider Wednesday, underperforming their European peers. But new fears over Greece, which is currently in a political stalemate and risks leaving the euro, are weighing on those credits, a trader said, as they are long-standing creditors of Greece and have investments in the country.

Societe Generale, Credit Agricole and BNP Paribas SA CDS contracts are over 20 basis points wider at 335, 332 and 278 basis points.

-By Serena Ruffoni, Dow Jones Newswires; +44 (0) 207 842 9349; serena.ruffoni@dowjones.com

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