Fitch: EC state-aid rules extension beneficial for Spain

 

(The following statement was released by the rating agency)

Dec 06 : The European Commission's extension of state-aid rules regarding banks during the financial crisis is pragmatic, in Fitch's view, and the minimal tweaks it includes create a more equitable system.

Italy's banks will also benefit from a measure in yesterday's supplementary fiscal package that allows the government to guarantee bank liabilities. Until now Italian banks have not issued government guaranteed debt. This should help the banks to refinance existing debt and strengthen liquidity because the government guaranteed bonds should be more attractive for refinancing operations in the repo market.

The European Commission changed its rules for guarantees over one year to reflect the fact that the value of a guarantee partly depends on the perceived credit quality of the guarantor. The Commission is not setting a price for sovereign guarantees of bank debt, but setting a minimum rate at which a guarantee will comply with state aid rules.

The rules take into account the relative credit default swap (CDS) spread of the bank compared with other European financial institutions, and the CDS spread of the guarantor relative to the median for EU Member States.

For example, the minimum cost of a guarantee for a bank in Germany with the same CDS spread as the iTraxx Financials would be 116bp, whereas the same bank in Portugal would pay 70bp for its sovereign guarantee. On Friday Portugal's five-year CDS spread was 1,025bp (three-year median of 243bp), compared with 91bp (three-year median of 39bp) for Germany, according to Fitch's CDS Pricing Service.

The difference in the minimum price of the guarantees is reduced by the European Commission formula's use of the median of CDS spreads over three years rather than the mean. If the mean were used the minimum price of the German guarantee would be about 80bp more than the Portuguese guarantee.