EU Finance Ministers Decide to Force Banks to Take Bigger Greek Bond Losses, Recapitalize by $140 Billion; Amount Insufficient, Few Other Details

Details are sketchy but Reuters reports Banks under pressure in Europe crisis, pushed to raise capital, take Greek losses

On Saturday, the finance ministers of the 27-country European Union decided to force the bloc's biggest banks to substantially increase their capital buffers -- an important move to ensure that they are strong enough to withstand the panic that a steep cut to Greece's debt could trigger on financial markets.

A European official said the new capital rules would force banks to raise just over euro100 billion ($140 billion), but finance ministers did not provide details on their decision. The official was speaking on condition of anonymity because it had been agreed to let leaders unveil the deal at their first summit Sunday.

The deal on banks was likely to be the only major breakthrough ready to announce on Sunday, leaving many important decisions and negotiations to be completed by Wednesday night.

On Friday, the first day of the marathon talks, the finance ministers of the 17 countries that use the euro -- and which have found themselves at the center of the crisis because of the currency they share -- agreed to demand Greece's private creditors take big losses on their bondholdings.

But they still have get the banks to come along and convince them that the cuts are the best way to ensure that Athens can eventually repay its remaining debts.

The picture in Greece, whose troubles kicked off the crisis almost two years ago, is bleaker than ever. A new report from Athens' international debt inspectors -- the European Commission, the European Central Bank and the International Monetary Fund -- proved that a preliminary deal for a second package of rescue loans reached in July is already obsolete.

The report showed that in the past three months Greece's economic situation has deteriorated so dramatically that for the bank deal to remain in place, the official sector would have to provide some euro252 billion ($347 billion) in loans. Alternatively, to keep official loans at euro109 billion ($150 billion), banks would have to accept cuts of about 60 percent to the value of their Greek bonds.

"I believe we are now arriving at a more realistic view of the situation in Greece," said German Chancellor Angela Merkel, the country that has long been advocating a more radical solution to Athens' problems.

But Merkel and her eurozone counterpart were on for tough negotiations with the banks.

Charles Dallara, who has been representing private investors in the talks with the eurozone, said Saturday that negotiations that carried on sporadically throughout Saturday were making only slow progress.

"We're nowhere near a deal," he told The Associated Press in an interview.

Germany and France still disagree over how to give the EFSF more firepower. France wants the fund to be allowed to tap the ECB's massive cash reserves -- an option that Germany rejects. Weaker economies, meanwhile, are wary of signing up to the other two parts of the grand plan -- bigger bank capital and cuts to Greece's debt -- without assurance that sufficient buffers are in place.

Recapitalization Insufficient

100 billion Euros is insufficient. The IMF pegged the amount between 100 billion and 200 billion. There is absolutely no reason to suspect the minimum is needed. Indeed, there is every reason to expect 400 billion euros is insufficient.

Capital Shortfall Estimates of European Banks Range from 8 to 413 Billion Euros

The Wall Street Journal reports widely varying analyst ranges in its article European Banks Face New Scrutiny Over Capital Needs

Analyst Estimates

• Citigroup estimates there is a capital shortfall of between €64 billion and €216 billion for banks to achieve a minimum core Tier 1 ratio of 7% to 9%, respectively.


• Credit Suisse came up with a similar figure of €220 billion for the potential 9% scenario.


• Analysts at Espirito Santo said write-downs at current market prices on Greek, Portuguese, Irish, Italian and Spanish bonds, along with a higher minimum capital ratio of around 9%, could require as much as €413 billion in new capital across the sector.


• Merrill Lynch analysts in turn came up with estimates of between €7.6 billion and €143 billion in required capital for the region's major banks, depending on various scenarios.

These ranges provide more questions than answers. Moreover, low-end lowball estimates such as €7.6 billion by Merrill Lynch are preposterous under all but the most ludicrous scenarios in the third round of "stress-free" tests now underway.

Deutsche Bank AG Chief Executive Josef Ackermann says it isn't clear recapitalization efforts will help solve the crisis.

Hey, let's just not recognize any bank losses ever.

Credit Suisse Estimates

Zero Hedge has some interesting charts of capital shortfalls as estimated by Credit Suisse.
Commentary and charts below from Credit Suisse. No link provided. Click on charts for sharper image.

One of our conclusions was that the overall European banking sector is facing a €400bn capital shortfall which compares to a current market cap of €541bn.

The table below details the breakdown of our estimated capital shortfall.

Figure 6: European banks – Capital deficit in CS ‘accelerated sovereign shock

I believe 400 billion Euros will prove way insufficient once Portugal, then Spain, then Italy get into trouble.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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