The euro, struggling with the effects of the new EU bank stress test and the expenses of a potential new Greek bailout, dropped to a record low against the Swiss franc on Monday.
Analysts said haven demand for the Swiss franc heightened as investors’ attention turned to a European Union summit on Thursday, at which leaders will meet to discuss the financial stability of the eurozone and a second rescue package for debt-burdened Greece.
Eight banks of the 91 under scrunity failed the test, five of these coming from Spain, two from Greece and one from Austria. The European Banking Authority (EBA) estimated that the eight banks would need to find €2.5 billion of additional liquidity before the end of 2011 in order to repair their balance sheets. However, the EBA warned that a further sixteen European banks were in danger of failing the next stress test unless they took steps to bolster their liquidity.
Market reaction following the release of the test results suggested incredulity, as the euro failed to gain support. According to Equilor analysts, the fact that Herman van Rompuy, president of the European Council, announced the date for the extraordinary summit on the Greek crisis right after the stress test results were published was not a mere coincidence.
The EBA was practically used by the EU to examine to what extent European banks would be able to contribute to the second bail-out package for the Greeks, Equilor said.
Commentators have also suggested that the markets doubt the veracity of the tests themselves, following last year’s stress test, which the leading Irish retail bank, Allied Irish, passed. Within a few months, AIB had to be bailed out by the Irish government. Fears that the test was ‘too easy’ were echoed by leading ratings agency Standard & Poor’s prior to the results.
“While last week market were anxious about the test and predicted the failure of a large number of banks, now it seems that they are unsatisfied because too few banks have actually failed,” András Somi, head of retail research at KBC Securities told the Budapest Business Journal.
Pressures on the euro has led to CHF/HUF exchange rates spiking, a fact that is detrimental to many Hungarian households’ finances due to widespread franc-based mortgage loans.
At quarter to nine on Monday morning, the Swiss currency hit a new record high: it traded at 238.38 versus the forint. It fell somewhat later in the day, closing at 237.31, which is however still high above the average of 2011. It is also 50-60% higher than the rate when the first few waves of CHF-based loans were taken out in 2006-2007.
The next EU emergency meeting, scheduled for Thursday, could tackle the possible involvement of private investors in settling the Greek woes. But this, obviously, will not deliver a solution overnight.
“Even in a best-case scenario, I only expect a temporary correction in the exchange rate of the Swiss franc and the Hungarian currency,” Equilor analyst Tamás Gerőcs said, adding that there are still considerable risks regarding the US and European markets, and this can further strengthen the haven-currency position of the Swiss franc.
Swiss intervention?
No major change is expected in the Swiss franc exchange rate in the near future, analysts say. Some claim that the Swiss could look to impose capital controls in order to limit the strength of the Swiss currency. The time for the Swiss National Bank (SNB) to step in may loom near according to Reuters: SNB’s vice-chairman Jordan highlighted that not only were they “very concerned” but that they were “monitoring the euro-franc exchange rate very closely”.
It is still difficult to tell when such intervention could occur, but once it does, it could be a harmonized action together with other central banks, Gerőcs from Equilor said.
SNB’s room for maneuver is further limited by the global inflation pressures which could soon reach the Swiss economy. Although the 0.7% June inflation data is reassuring, the IMF warned earlier that if the inflation rate goes up, the base rate will need to be lifted.
“It is not likely any time soon, but taking the base rate policy of the European Central Bank into consideration, the SNB could raise its current 0.25% base rate at some point in the future,” Gerőcs added.
Raising the base rate on the Swiss currency might put troubled borrowers in Hungary an even more difficult situation. The help offered by the Hungarian government – fixing the HUF/CHF exchange rate at 180 – is only a temporary relief, and “the further the exchange rate deviates from the fixed 180, the more serious financial burdens borrowers will face once the moratorium expires,” Somi of KBC Securities noted.
Hungary’s OTP Bank passed the test. The bank said its estimated consolidated Core Tier 1 capital ratio would change to 17.2% under the baseline scenario in the stress test and to 13.6% under the adverse scenario in 2012 compared to 12.3% as of end of 2010.
However, in spite of the results, OTP shares dropped 3.18% to HUF 5,325 on Monday morning.
“OTP’s results on the test were not a surprise at all,” Gerőcs told the Budapest Business Journal. “Therefore it has not stir up market sentiment, what’s more, shares took a smaller dive this morning due to the bank’s foreign currency exposure.”
(Dolores Katanich contributed to this article.)
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