Despite European banks putting a bond friendly regulatory framework in place, investors have shunned European bank bonds in the last few months says Simon Chester of American Century Investments.
Pointing to the widening yield spreads between European bank bonds and government bonds he puts it down to four major contributory factors: exposure to sovereign debt, uncertainty over any bail-out(s), the global economic downturn and the challenges to banks of raising capital as lower risk is chased.
But American Century Investments  does think that the European banking sector is still relatively strong. ‘We believe the banking sector as a whole is robust enough to withstand foreseeable pressures on European debt, given the banks’ capital ratios and sovereign exposure levels.’ The company’s weekly market update says.
But the austerity measures required in some countries and the threat of contagion across to the weaker countries like Italy and Spain still exists. But they say ‘Italy and Spain have surmountable fiscal challenges, in our view. But if these challenges are not met, the losses that these two larger nations would pose for the European banking sector appear substantial to us.’
In their opinion the US is in worse fiscal shape than the EU but also add that ‘We believe a single fiscal entity would make it much easier to withstand and overcome the current debt problems’.
But they go on to say that this single European fiscal entity is unlikely to happen soon saying ‘Europe does not appear to have the political mandate to explicitly support consolidated sovereign debt. We anticipate a prolonged sovereign debt impasse. Meanwhile, we believe the fiscally struggling countries need time to implement austerity measures and build a credible path to meet their fiscal goals.’
Overall the company expects sentiment towards the European banking sector to remain weak ‘for some time’.