Bloomberg News

UBS’s Ermotti Says No Euro-Region Sovereign Bond Is Risk Free

November 25, 2011

Nov. 24 (Bloomberg) -- UBS AG Chief Executive Officer Sergio Ermotti said he wouldn’t consider bonds of any euro- region country as free from risk as the sovereign-debt crisis intensifies.

“The concept of risk free no longer exists,” Ermotti, who was confirmed as UBS’s CEO on Nov. 15, said in an interview in New York last week. “The only thing I’d treat today as a zero- risk-weighted asset is Swiss government bonds.”

Germany failed to get bids for 35 percent of the 10-year bonds it offered for sale yesterday as the crisis spilled into the core of the euro area. European banks have been selling sovereign debt after policy makers pushed them to take losses on Greek bonds and carry higher reserves. The European Banking Authority said it would require lenders to boost capital by 106 billion euros ($141 billion) after marking their government debt to market values in stress tests.

“The EBA stress test is de facto hypocrisy,” Ermotti, 51, said. “They’re saying government bonds are still zero risk- weighted, but in the stress test we’re going to ask people to do a haircut, which means they’re no longer zero risk-weighted.”

UBS, which wasn’t part of the test, said last week it would have “comfortably exceeded” the EBA’s requirement for a 9 percent core Tier 1 capital ratio by mid-2012. Switzerland’s biggest bank cut its net risks related to the sovereign debt of Italy, Belgium, Spain, Greece, Portugal, Iceland and Ireland in the third quarter to 1.34 billion francs ($1.46 billion).

‘Fundamental Rebalancing’

Andreas Schmitz, president of the German banking association BdB, said earlier this week that assigning zero risk-weightings to government bonds was a “conscious and targeted piece of regulation from politicians” that “without a doubt created false incentives and should now be replaced step- by-step.”

The loss of risk-free status for sovereign debt will force banks to undertake a “fundamental rebalancing of portfolios,” and raises questions about which asset class will be considered a safe haven, source of liquidity and collateral for counterparties, Deutsche Bank AG CEO Josef Ackermann said in a Nov. 18 speech in Frankfurt.

An escalation of the euro area’s crisis was required to provide countries with an incentive to push forward with efforts to reduce indebtedness, Ermotti said.

“It’s necessary, for sure, for Italy to be under pressure to accept the reform,” said Ermotti, who comes from the Italian part of Switzerland and worked for five years at UniCredit SpA, Italy’s biggest bank, before joining UBS in April. He expressed confidence that Italy, whose two-year bond yields rose this week to more than the 10-year rate, will find a solution.

“Italians themselves don’t think that Italy will default,” he said. “At the end of the day, the Italians are going to be proud enough to react and do the right thing.”

UBS Downsizing

Ermotti last week presented a plan to cut UBS’s risk- weighted assets by 130 billion francs by the end of 2016 and boost capital ratios as market turmoil underlines the importance of capital strength.

The amount of the scale-down at the investment banking unit was determined by balancing the interests of the shareholders and clients, he said, while restarting dividend payments is a “sign of confidence” in the bank’s strategy.

“People who think we could have done more are basically not understanding the execution risk and the cost of doing that,” Ermotti said.

--With assistance from Christine Harper, Otis Bilodeau and Daniel Hertzberg in New York. Editors: Frank Connelly, Stephen Taylor

To contact the reporter on this story: Elena Logutenkova in Zurich at

To contact the editor responsible for this story: Frank Connelly at;

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