Bad news for those who favor the idea that the new year is a great time to change your life. This cliché does not pan out usually, which is certainly true for the stock market. If in 2011 the banks were haunting indexes with their numbers in the red, yesterday history repeated itself.
What is the main reason that the financial sector is not improving upon last year when it was one of the markets worst-performing sectors (it lost 32% on the year)? Capital requirements. The European Banking Authority (EBA) wants the Spanish banking sector to have more than 26 billion euros in cash reserves.
The Italian lender Unicredit felt the repercussions of this requirement yesterday. The bank discounted a debt issue by 43% in order to raise 7.3 billion euros in capital. The news caused markets to plummet. The bank's shares closed the trading session down 14.5% and drug down the rest of the European financials. With good reason, investors are fearful that this Italian bank is not the only institution that must resort to major discounts in order to raise funds. And they have already started placing bets on who will be the next to sell cheap debt.
Spanish and Italian companies won't pay dividends
French banks Crédit Agricole and Société Générale, who have suspended their dividend payments for 2011 (Unicredit also made this choice before raising more capital), which closed yesterday with 3% and 3.41% losses, respectively. In order to raise cash, Spanish lenders have also opted to pay shareholders in shares instead of a dividend.