Sovereign rating key for banks

The financial performance and risk profiles of Greece’s top four banks will largely depend on developments in Greece’s sovereign debt rating, Fitch Ratings said yesterday. «The fiscal and macroeconomic deterioration in Greece along with the multiple downgrades of Greece’s sovereign rating have led to a close correlation between Greek sovereign and Greek bank risk,» Fitch said in a report, referring to National Bank, Eurobank EFG, Alpha Bank and Piraeus Bank. «Any negative rating action on Greece is likely to be mirrored in the rating of Greek banks.» Profitability pressure from sustained high nonperforming loan charges in 2011 could be partly offset by loan repricing, cost control, expected lower marked-to-market trading losses and better prospects in exchanges in Southeast Europe and Turkey, the rating agency said. Although the major Greek banks’ levels of capital are «adequate,» the macroeconomic environment requires significant capital buffers that are above the regulatory minimum to cover anticipated credit losses, Fitch said. Meanwhile, the premium investors demand to hold 10-year Greek government bonds rather than benchmark German bunds rose yesterday after the European Central Bank’s chief said nothing supportive for the peripheral countries of the eurozone – Greece, Spain, Portugal and Ireland, according to traders. The Greek/German bond yield spread broke above 900 basis points (bps) yesterday for the first time since late September, touching 901 bps versus 858 bps on Wednesday. The equivalent Portuguese spread hit 431 bps, up 31 bps on the day, while the Irish/German bond yield spread rose to a fresh eurozone lifetime high of 540 basis points, up 20 bps. European Central Bank President Jean-Claude Trichet, speaking after the eurozone’s central bank left rates unchanged at 1.0 percent earlier in the session, had offered «nothing that is friendly for peripheral sovereigns,» a dealer in London said, Reuters reported. «He didn’t hint that the liquidity exit strategy will be extended or anything like that, so there is simply nothing there for people to feel good on about peripheral debt,» the dealer added.