Euro woes return with a vengeance

EUROPEAN banks were caught in a wave of new anxiety yesterday as doubts over capital-raising plans and Hungary’s solvency caused investors to drop stock in the continent’s major lenders.

Shares in UniCredit, Italy’s biggest bank, dropped 17.3 per cent to their lowest level since 1985 as markets fret over its heavily discounted rights issue, which prices the stock at less than a third of its closing price on Tuesday.

And the debt crisis flared in Hungary after the sovereign failed to find enough buyers for 45bn forints (£116m) of its bonds, pushing ten-year yields to an eye-watering ten per cent.

The euro yesterday plunged to a 15-month low against the pound.

The news also increased the yield on Austria’s bonds due to the large exposure of Vienna’s banks to Hungarian mortgage-holders, who are vulnerable as the euro strengthens against the forint, inflating their debts.

Austria’s Erste Bank plunged nine per cent and Raiffeisen Bank lost 6.3 per cent as the forint dropped to a record low versus the single currency.

The rest of Europe’s banks received a battering on the back of new debt worries, with Deutsche Bank losing 5.6 per cent after being hit by rumours of a rights issue.

The European Banking Authority announced last month that EU banks must raise a total of €115bn (£94.9bn) in new capital in order to make up for massive write-downs on their sovereign debt holdings.

UniCredit is the first to test markets with a plan to raise €7.5bn at a steep discount. Although the issue is fully underwritten by an army of banks advising on the deal, some shareholders are reluctant to hold stock at significant premium to the rights price.

“It begs the question where the rest of the €107bn capital ask for Europe’s banks is going to come from... One [or] two rights issues like UniCredit will leave underwriters choked!” said New Edge’s Bill Blain.

British banks were relatively insulated, as the EBA judged they do not need to raise any new capital. Barclays, the largest faller, lost 2.5 per cent.

The squeeze on banks makes it increasingly difficult for them to soak up debt from sovereigns. The Institute of International Finance (IFF), an industry group, warned yesterday that banks are being “incentivised” to ditch government bonds by the EBA’s decision to write them down in stress tests.

“It is likely that EU banks will continue to reduce their exposure,” it said. It follows the news that regulators are mulling scrapping the “risk-free” status of sovereign bonds in capital rules.