The mandatory recapitalization was one of the main achievements of European leaders’ summit meeting that ran into the early hours Thursday in Brussels. But it will not be enough to erase doubts about banks’ creditworthiness and restore their access to international money markets, analysts said.
The big problem is that Italy, with its dysfunctional politics and nearly €2 trillion, or around $2.8 trillion, in outstanding debt, has supplanted Greece as the biggest threat to European banks and the biggest source of investor anxiety. If Italy were to have trouble servicing its debt, no amount of fresh capital could protect the European banking system.
“Everything depends on Italy,” said Lüder Gerken, director of the Center for European Policy in Freiburg, Germany. “If Italy goes under, a recapitalization won’t do anything.”
“Italy has to make fundamental reforms,” he added. If not, “then the euro is history.”
Like most of what emerged from Brussels, the plan to strengthen banks was seen as good, but not quite good enough.
The measures start to address the fragility of the European banking system, one of the core elements of the debt crisis. Continental banks generally have lower reserves than their U.S. counterparts, making them less able to absorb losses from their holdings of government bonds or other troubled assets.
As a result, many European banks have been cut off by U.S. money market funds and other wholesale lenders, and have become dependent on emergency funds provided by the European Central Bank. The recapitalization plan would compel 70 European banks to raise an estimated €106 billion by mid-2012, according to the European Banking Authority, which will oversee the drive. They will be required to hold reserves equal to 9 percent of the money they have at risk. And they will be required to recognize market losses in their holdings of government bonds.
Banks would also get government guarantees to help them issue bonds for longer periods, though details remain to be worked out. Analysts said the guarantees were one of the most positive aspects of the plan because they would help provide banks with a steadier source of funds.
Banks can increase their reserves by hanging on to profits rather than distributing them to shareholders, or by selling assets to reduce overall risk. As a last resort, they can turn to their governments or the euro zone rescue fund. But most will do anything to avoid the government involvement and the accompanying restrictions on executive pay that would result.
“One thing goes without saying: We do not intend to make use of public funds,” Eric Strutz, the chief financial officer of Commerzbank in Frankfurt, said in a statement.
The potential losses from Greek debt are now easier to quantify, at least. As part of an agreement with representatives of banks and insurers, investors will accept a 50 percent cut in the face value of Greek bonds. Details remain unclear, but it appeared that Greek creditors would receive guarantees of some kind to protect them from further losses.
Christian Noyer, the governor of the Bank of France, said banks in that country and elsewhere in Europe can handle the 50 percent loss without problems, in most cases. Some had already factored it into their accounting. While a handful of banks in Greece will have to raise new capital, he said during an interview, Greek banks owned by Société Générale and Crédit Agricole are not among them. Fears about the exposure of the French banks’ Greek subsidiaries had weighed on their share prices in recent months.
Because the debt-relief plan is supposed to be voluntary, it would not trigger the payment of insurance, known as credit-default swaps, that some investors have purchased to protect against losses on Greek debt.
The swaps were in some ways a greater source of anxiety than the debt itself. Three years after American International Group required a $182 billion U.S. taxpayer bailout because of insurance it issued on mortgage-backed securities, the market for credit-default swaps remains opaque. There is a dearth of information on which companies might have insured Greek debt, and a risk that some banks or other issuers were overexposed.
The International Swaps and Derivatives Association, the official arbiter of whether a so-called credit event has occurred, said Thursday that the Greek debt-relief plan probably would not lead to debt insurance. “It does not appear to be likely that the restructuring will trigger payments under existing C.D.S. contracts,” the association said in a statement, though it cautioned that it was too early to make an official ruling.
Still, much of the uncertainty that has undermined European banks remains. The size of the bank recapitalization is at the low end of expectations, raising questions whether it is big enough. French banks will need to raise about €9 billion and German banks about €5 billion. Greek banks will need the most fresh money — about €30 billion — followed by those of Spain and Italy.
Some banks, meanwhile, complain that the sums are too high, requiring them to meet regulatory standards that were not supposed to apply until the end of the decade. They complain that they will have no choice but to curtail lending and sell assets at depressed prices to achieve the required capital ratios.
“What banks would have had by 2019 they want to see in six months, at a time when capital markets are closed,” said Herbert Stepic, chief executive of Raiffeisen Bank International in Vienna.
There remains a deep uneasiness among analysts and investors.
“Exposure of banks to Greek assets is not big enough to create a systemic risk,” said Stephane Deo, head of European economic research at UBS. “The problem is if the market starts to panic.”
Liz Alderman contributed reporting from Paris.
Article source: http://feeds.nytimes.com/click.phdo?i=bf0b3f348e32026f322a286c371586aa
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