World Markets

Goldman: Systemic risks for markets are 'stirring'

Fears of another liquidity shock in the European banking system have gripped the markets this week, with the price of insurance for European bank debt ballooning as market confidence in the region's lenders fades rapidly.

Credit markets are "clearly taking note of the systemic risk", but European banks' access to capital and the short-term funding pressures they are tackling are "far less critical" than what lenders faced during the European sovereign debt crisis seven years ago, Goldman Sachs analysts said on Tuesday.

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"We understand why markets might worry. Following the global financial crisis, European banks did not de-lever by nearly as much as U.S. banks. Moreover, to meet rising capital requirements, many European banks were planning to rely on retained earnings," said head of global credit strategy at Goldman Charles Himmelberg, in a note to clients on Tuesday.

Bank share prices have faced a dreadful start to the year, with major lenders on both sides of the Atlantic seeing average falls of around 25 percent.

Deutsche Bank and Unicredit shares are both down around 40 percent this year, after fears about the banks' capability of meeting their liabilities to investors.

"Credit markets are clearly taking note of the systemic risk, and it is certainly unwise to minimize such risks since systemic fears, once in place, can be self-fulfilling and difficult to reverse," Himmelberg added.

"But we see many offsetting considerations. For one, the 'capital-raising' pressures currently facing European banks are far less critical than the short-term funding pressures faced during the European sovereign crisis. European banks have ample access to short-term liquidity via balance sheet liquidity, money markets, deposits, and European Central Bank backstop facilities such as the Long Term Refnincing Operation (LTRO), Targeted-LTRO, Emergency Liquidity Assistance (ELA)," Himmelberg said .

Deutsche Bank co-CEO John Cryan rushed Tuesday to reassure investors and staff on the bank's stability, saying that the lender remained "absolutely rock-solid" and that he did not share the market's concern over the adequacy of its balance sheet.

Deutsche Bank had already stressed Monday that it had "sufficient" reserves to service its so-called tier 1 debts, or its most junior bonds.

But this did not stop the cost of insuring the debt of Deutsche Bank by using credit default swaps (CDS) from spiking, widening further than at any point during the financial crisis in 2008.

While elevated, financial credit spreads are also "far from distressed levels", but "the re-introduction of systemic risk premia would materially erode the outlook for credit," Himmelberg added.

Goldman also noted that heightened volatility had forced the bank out of a number of its "Top Trade" recommendations including plays on 5-year Italian and German sovereign bonds and its suggestion to be long, or bet on gains in U.S. banks vs. the S&P 500.

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