l e a d e r s h i p p r o b l e m so l v i n g v a l u e c r e a t i o n © copyright 2011....
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L E A D E R S H I P P R O B L E M SO L V I N G V A L U E C R E A T I O N
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Alvarez & MarsalChallenges facing the European Banking Sector
September 2011
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Banking Crisis is back in Europe
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Financials index
Source: Reuters EcoWin
jan09
maj sep jan10
maj sep jan11
maj sep
Inde
x ja
n 20
10=1
00
40
50
60
70
80
90
100
110
120
Euro STOXX financials
S&P500 financials
iTraxx Financials Senior 5 year CDS
September 15th; Wall Street Bank Lehman Brothers files for Chapter 11 Bankruptcy protection and Merrill Lynch is taken over by Bank of America
September 30th;The Irish government guarantees deposits in the country’s main banks for two years
January 15th; The Irish Government says it is to nationalise the Anglo Irish Bank
January 16th; The US government provides the Bank of America another 20 billion dollars from its 700 billion dollar financial rescue fund to help it with the losses incurred when bought Merrill Lynch
February 11th; Ireland says it will inject €7 billion into Bank of Ireland and Allied Irish in return for guarantees on lending, executive pay and mortgage arrears.
May 2nd; Greece gets a €110billion bail out from other countries using the euro, and the IMF
June 22nd ; Greek PM tries to persuade MPs to approve €28 billion of cuts, tax rises, fiscal reforms and privatisation plans. Euro zone ministers say the legislation must be passed to receive a 12billion Euro loan Greece needs to pay its debts
November 21st; Irish Finance minister says he will recommend to the Government that the country formally request a bailout package from the EU, ECB and IMF
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Total Debt outstanding as % of GDP €bn
96%
60%
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Ireland Greece Portugal Credit bubble Inflated property market Poor lending practices Over reliance on property taxes Property crash Govt. Guarantee transferred
bank risk to the sovereign Series of bank recapitalisations
which stretched the sovereign Troika support package Independent stress tests to
establish capital needs for banks
Sovereign issued too much debt, a significant part of which was purchased by Greek banks
Lower rates of tax collection Insufficient public sector reform Market confidence in sovereign
dropped First and second Troika support
package Risk of haircuts on sovereign
debts weakened bank balance sheets
Delays in implementation of agreed package
Stress tests being conducted to bring transparency on bank balance sheets
Sovereign issued too much debt Insufficient reform to increase
flexibility Market confidence in sovereign
dropped Troika support package Reform package agreed Stress tests being conducted to
bring transparency on bank balance sheets
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Sovereign downgrades have an extremely negative effect on domestic banks funding options
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Debt Exposure Breakdown
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The outlook for Ireland Inc
Bonds prices have stabilised. Ireland currently delinked from Greece
Exports are increasing Banks are attracting new investors – Bank of Ireland
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Non-Performing Loans in Europe
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Outlook for Europe
10
Ireland, UK, Eastern and Northern Europe in relatively good shape
Majority of sovereign debt is held by domestic and German banks
Therefore debt restructuring will adversely affect already weakened domestic banks
In the event of a debt restructuring of 30-50%; the worst hit will be domestic and state-owned German banks*
French banks already experiencing liquidity problems
* Measured impact of a haircut that is greater than 5% of Tier 1 Capital
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The next 12-18 months
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Banks can only mitigate the effects; unable to eliminate them.
Greater reliance on central bank liquidity & ECB/IMF funding options
Liquidity / Sovereign risk trade-off
The continent will have to become more transparent before we can hope for stability
Government administration needs to be restructured
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