Little seasonal cheer for bank CDS spreads

Europe's big banks have endured a rocky month of ratings downgrades, eurozone discord and funding stress

Christmas might be just around the corner, but there has been little merriment for Europe's biggest banks, which have endured a volatile few weeks in terms of credit default swap (CDS) spreads. Markets have been digesting ratings downgrades, political friction over attempts to bolster the eurozone, and signs of growing funding stress within the industry.

Spreads had been widening gradually before a new European Union (EU) 'fiscal compact' to restore discipline to the continent was agreed by all member nations bar the UK at an EU summit on December 9. Spreads then spiked, peaking for many firms around December 14 amid rumours of a ratings downgrade for France.

After this, risk perceptions generally declined, despite the December 16 downgrade of Barclays Capital, BNP Paribas, Credit Suisse, Deutsche Bank and Société Générale by Fitch Ratings. By 1pm UK time today, spreads on some firms had dropped below their starting point for the month. The strong take-up of the European Central Bank's Long Term Refinancing Operation – which yesterday extended €489.191 billion of discounted three-year loans to 523 European financial institutions – failed to have any appreciable effect on risk perceptions, with many market observers saying the strong demand for cheap liquidity demonstrated the weakness of European bank funding positions.

French banks had a particularly bumpy month. Société Générale rose from 335 basis points on December 1 to 401bp on December 14, before falling back to 347bp by 1pm UK time today, according to data from Markit. During the same period, spreads on BNP Paribas moved from 269bp to 324bp on December 14, and have since narrowed to 265bp.

Over the Swiss border, Credit Suisse moved from 165bp on December 1 to 148bp today, while UBS widened from 195bp to 201bp over the same period.

On the eurozone's periphery, Spain's Santander began the month on 364bp, rose to 417bp on December 14 and then narrowed to 363bp by yesterday. In Italy, UniCredit rose from 589bp to 613bp, then fell to 553bp.

Deutsche Bank spreads started the month at 239bp and are now significantly lower, at 197bp. In the UK, Royal Bank of Scotland spreads moved from 340bp on December 1 to 389bp on December 14, and fell back to 354bp by December 22, while Barclays moved from 209bp to a peak of 244bp, and is now at 207bp.