Spanish banks would be the most affected, only behind Italians and Germans, in the event that the European Central Bank (ECB) decided to limit the direct exposure of entities to sovereign debt to 25%, according to the agency Qualification Fitch.
According to the data revealed through the recent tests carried out by the ECB and the European Banking Authority (EBA), Spanish entities had an aggregate sovereign exposure of 282,000 million euros , so if the 25% limit is applied they should relocate Some 206,000 million euros currently invested in public debt, mainly Spanish.
In this sense
Fitch warns that this hypothetical rebalancing process could affect the profitability of sovereign debt, since in the case of Spain the debt that should be adjusted would be equivalent to more than 20% of the volume of public debt in Spain. In his analysis, Fitch warns that banks keep large amounts of sovereign debt from their respective countries in their balance sheets, “especially the medium-sized banks in the countries of southern Europe.
In fact, the agency emphasizes that in the middle banking of Spain and Italy this bias towards their respective sovereign debts is “particularly strong” and practically represents all exposure to sovereign bonds. On the other hand, Fitch argues that the banks of the South of the euro zone could be moved to acquire higher quality debt, which offers a lower profitability, which, on the other hand, could damage their already weak income. “A decrease in the average profitability of 50 basis points in the domestic debt portfolios would imply an average reduction in operating profit before default of 4.2% for banks in these countries, ” says the rating agency.
MORE THAN ONE BILLION EUROS AFFECTED
The hypothesis that the ECB imposes a 25% limitation on banks’ exposure to sovereign debt would imply the need to relocate 1.1 billion euros from the total of 1.7 billion invested in this type of assets. With this threshold, contemplated in the Basel recommendations, German banks should relocate 330,000 million of their sovereign debt portfolio, which amounts to 435,000 million, while Italian banks would be forced to relocate 243,000 million out of a total of 357,000 million.
However, the agency emphasizes that, although limiting the concentration of sovereign risk by entities “makes prudential sense” by weakening the link between banks and the State, its application in practice could be difficult and it is not clear that it could be achieved The necessary consensus.
On the other hand, the agency states that, given the recent comments of the President of the ECB, Mario Draghi, market participants could speculate with the possibility that the central bank can become the buyer of this sovereign debt if necessary through unconventional measures.
And who will absorb the 206 billion euros in bonds left over from the balance sheets of Spanish banks?
Well, I only see one possible buyer. The Hedge Fund chaired by Draghi and called the ECB is the only one that can keep all the paper without causing a catastrophe in the markets. Purchased at record lows, the bank will score significant benefits and the bonds will be buried under the ECB carpet.