US banks are benificiaries of a great flight to quality as European banks are getting hammered in the PIIGS crisis
The European sovereign crisis continues to pressure CDS and bond market spreads for both the sovereigns and banks. Now there is not much separation between the sovereigns and the banks that hold their paper. Via Moody's:
The problem is most European banks have a ton of European Sovereign debt on their books. US banks do not. So as can be imagined, investors seeking bank exposure try to get out of anything that might have Portugal or Greece exposure.
At the bank level the extremes are getting more extreme: 64% of European banks have CDS-implied ratings that are six or more notches below their Moody’s ratings. Permanent resolution of the crisis and a prolonged tightening of spreads seems to be some way off, although incremental steps are in the works. The credit markets’ view of the US banking system stands in stark contrast. Given US banks’ recent woes and continued challenges, it’s hard to imagine that they would be the beneficiaries of a flight to quality. But in light of events in Europe, that’s exactly what is happening.
There is a remarkable contrast between the credit markets’ worries over European banks and their views of US institutions. We see this in the average CDS-implied rating by region, which shows a recent sharp deterioration for European banks. While US banks have maintained an average CDS-implied rating of Baa2 since the start of 2010, the comparable metric for European banks has worsened from Baa3 to Ba2 (Figure 7). The aforementioned widening of sovereign credit spreads, which has resulted in a decline in the average CDS-implied rating for European sovereigns form A2 to Baa1, has been an important factor in this movement.