The European debt crisis has not gone away. Concern about Euro debt has ebbed and flowed in the markets for the last two years, but is still far from a solution. Periodically, various high-level meetings and resulting announcements of vague outlines of plans have led to quiet periods, only to re-emerge again when something happens that indicates that not much has really been accomplished, and that there are still serious problems ahead.
The latest eruption of worry burst forth as Unicredit, Italy’s largest bank, had to offer more than a 40% discount to existing shareholders to buy two shares for every one held. The disheartening news set off a chain reaction, as the need to raise capital is not restricted to Unicredit, but applies to almost all Italian banks and many major financial institutions throughout Europe as well. As a result, bank stocks plunged throughout the continent and impacted the general markets as well. Interest rates climbed and the Euro broke below $1.28 for the first time since September 2010. In addition the European Financial Stability Facility (EFSF) had to pay much higher rates to sell 3 billion Euros of debt.
That isn’t all. As potential harbingers of things to come, the Spanish regional government of Valencia is a week late in repaying a 123 million Euro loan to Deutsche Bank. We doubt that many in the investment community were aware of Valencia’s finances before, but this is just the sort of thing that pops up out of nowhere during a financial crisis and snowballs into something much larger. Adding fuel to the fire, the Hungarian florint has hit a record low as the cost of insuring Hungarian debt against default rose to a record high for the third consecutive day. Some European banks have large exposures to Hungarian debt.