A failure by European regulators to make banks raise enough capital to withstand a sovereign default is complicating efforts to resolve Greece’s debt crisis.
The “fragilities” of Europe’s banking industry mean a Greek default isn’t an option, European Union Economic and Monetary Affairs Commissioner Olli Rehn said in New York last week. By delaying a decision some investors consider inevitable, policy makers risk increasing the cost to European taxpayers and prolonging Greece’s economic pain.
“European officials are trying to buy time for the troubled economies to get their house in order and the banks to be strengthened,” said Guy de Blonay, who helps manage about $41 billion at Jupiter Asset Management Ltd in London.
While estimates of the capital shortfall vary, the vulnerability of European banks to a sovereign shock isn’t disputed. Independent Credit View, a Swiss rating company that predicted Ireland’s banks would need another bailout last year, found in a study to be published tomorrow that 33 of Europe’s biggest banks would need $347 billion of additional capital by the end of 2012 to boost their tangible common equity to 10 per cent, even before any sovereign default.
European banks had $188 billion at risk from the government debt of Greece, Ireland, Portugal and Spain at the end of 2010, according to a report this week from the Bank for International Settlements. European lenders held $52.3 billion in Greek sovereign debt, with German banks owning the biggest share, the BIS data showed.
A year after the rescue that aimed to stop the spread of the debt crisis, Greece remains mired in recession, shut out of financial markets and saddled with Europe’s biggest debt load in proportion to its economy. Moody’s Investors Service said June 1 that it sees a 50 per cent chance of a Greek default. In a Bloomberg survey last month, 85 percent of international investors said Greece will probably default.
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European officials are preparing a new aid package for Greece that includes a “voluntary” role for investors after the EU and the International Monetary Fund approved the fifth installment of Greece’s ¤110-billion bailout last week. Policy makers in Europe have been debating how to let private investors, including banks, join Greece’s bailout without triggering a default. One option they’re considering is asking investors to reinvest in new debt when existing bonds mature.
Jean-Claude Juncker, who leads a group of euro-area finance ministers, floated the idea last month of a “soft restructuring,” under which maturities of existing debt would be extended. European Central Bank policy makers including Bank of France Governor Christian Noyer have opposed that approach.