The entwined fortunes of Greece and EU banks

AS European banking shares continue to take a knock, it is clear that the fortunes of many of Europe’s major banks are inextricably linked with the fortunes of the Eurozone. Should a Eurozone country default on its debt obligations, it is likely that it will take a number of banks down with it – namely those with unmanageable levels of periphery debt holdings.

As a result, CFD traders should play close attention to European policy squabbles when taking a position on one of the number of European banks that seem partially at risk.

“Investors probably feel like they’ve been bashed around in a boxing ring over the past few weeks, as the markets have swung within a narrow trading range between highs and lows,” says Angus Campbell, head of sales for Capital CFDs. “Each time we look like a move to the upside is imminent we’re beaten down again while moves to the downside are also limited.”

Ironically, wrangling over the proposed increase of the European Financial Stability Facility (EFSF) has done nothing to help stability in the European equities market. The scheme leans heavily on Germany bearing the brunt of the contribution – the IFO Institute estimates that if the measures are passed then Germany’s liability could reach €465bn.

And even if the measures were to go through, many believe that it will still be too small to credibly bailout peripheral Eurozone countries (see chart, below right).

But taking a short position on banking stocks is not the only option for CFD traders. Many have drawn comparison between the implosion of Lehman Brothers and the current trajectory of a number of French banks (see European bank exposure, below left). But while US authorities have occasionally allowed a toxic bank to fail, it is unlikely that France would do the same. As such, those with a strong stomach could take a position on a failing bank when a bailout seems imminent, hoping for a bounce when the measure was announced.