2011 'Banking Crisis in Slow Motion': Investor

Recent declines in banking and financial stocks are part of a "banking crisis in slow motion," one investor told CNBC as the markets awaited the outcome of a key vote on the European Financial Stability Facility (EFSF) in Germany.


Worries about the exposure of European banks to the debt of struggling peripheral euro zone economies such as Greece have weighed down their share prices in recent months.

"Banks don't have access to long-term finance, the markets have frozen since July, you have got money market funds pulling deposits and balance sheets are impacted," Nancy Curtin, chief investment officer at Close Asset Management, told CNBC Thursday.

"This is a banking crisis in slow motion."

On Thursday morning,members of the Bundestag, the German parliament, are expected to pass the EFSF.

Curtin believes the vote is "absurd" as she thinks the scale of the problem has intensified and "markets have moved on" since July.

The peripheral euro zone economies have close to 3 trillion euro ($4.1 trillion) of debt. Despite austerity packages including tax hikes and welfare cuts across the continent, doubts are being cast on their ability to continue repaying debts. There are also fears about how the region's banks will be affected.

Germany and France, the euro zone's two biggest economies, which so far have recovered relatively well from the 2008 crisis, will have to help bail out worse-performing countries.

"For Germany, it's heads you lose, tails you lose," she said.

"You're either going to lose your credit rating or going to have to put up more money or going to have to quit and ultimately monetize this, which is just anathema to Germany."

"French and German credit ratings are almost certainly at risk of downgrade after this," Satyajit Das, author of Extreme Money, told CNBC.

"The EFSF, according to Timothy Geithner, has basically got to be leveraged up. It looked like a CDO (collateralized debt obligation) and now they're creating another CDO. Isn't that how we got into this problem in the first place?"

There has been increased pressure from politicians elsewhere in the euro zone to solve its problems, with US Treasury Secretary Geithner calling on EU leaders to leverage the EFSF, making it more like a US TARP-style fund, to better tackle the debt crisis.

Das believes that European Union governments should ready themselves for hefty write-offs across the banking sector.

"People took bad loans and they're not going to pay them off," he said.

"Somebody somewhere is going to have to make a loss and that's going to have to be borne by savers and it's going to wipe out a lot of wealth."

The European Central Bank has bought nearly 160 billion euro in bonds since May 2010, more than half of those in the past couple of months, since it started buying up Spanish and Italian bonds.

Das believes that they may even have to recapitalize if there is a write-off of debt.

"First, you have to reduce debt. Second, you have to address the global imbalance where some countries can run up massive surpluses when others don't," he said.

"The third issue is the need for a single reserve currency."

"Living standards can't keep growing because people can't grow their portfolios at the same rate per annum," he warned.

US banks will continue to be affected by the "systemic" problems in the banking sector, according to Curtin.

"There are things which are unanalyzable, such as Basel III and mortgage costs," she added.

Analysts at Deutsche Bank cut their forecasts for the third quarter for US-based investment banks Goldman Sachs and Morgan Stanley on Thursday.

"The broker stocks have been under pressure due to the Euro sovereign issue (systemic fears) & weaker macro backdrop, but given significantly lowered expectations & valuations below TBV (tangible book value), we view these as priced in, & once we get some clarity around the Euro issue, we see meaningful upside," they wrote in a research note.