Europe’s banking system would need as much as ¤250 billion ($355 billion) of new capital if faced with a “sharp” increase in yields and a “severe” economic contraction, Standard & Poor’s said in a report.
The report imagines three stages that may happen from 2011 to 2015 including soaring yields triggered by an interest-rate shock, restricted market access for weaker sovereigns and a “very severe” downturn in the economies of Greece, Ireland, Portugal and Spain.
Of S&P’s sample of 99 financial institutions covering 70 per cent of Europe’s banking system, 22 would need new capital at a total cost of about ¤161 billion, according to the report. Extending that to the full European banking system would cost ¤200 billion to ¤250 billion, or about 2 per cent of economic output of those lenders’ jurisdictions, S&P said.
“The overall effect on the creditworthiness of western European countries, if it were to happen, would be severe,” S&P said in the report. “It would lead to substantially higher debt levels for all sovereigns throughout the region; hardly sustainable fiscal positions,” as well as the bank recapitalisations.
The scenario is based on “assumptions that do not reflect our current thinking,” S&P said.