June 25, 2010
European bank bailout needs €2 Trillion Euros?
Capital to asset reporting 'deeply unreliable'
A blog entry at the Financial Times Alphaville with report by Neil Hume about a talk with Willem Buiter, Professor of European Political Economy, London School of Economics and Political Science:
"Willem Buiter has been looking at the €860bn war chest the EU and the IMF have amassed to tackle the sovereign debt crisis in the eurozone and the unresolved question of what the cash might actually be used for. His big fear is the money, in particular the European Financial Stabilisation Fund, ends up being used as a bank recapitalisation funds, in much the same way the Trouble Asset Relief Programme (TARP) was ultimately used to inject capital in the US banking system, not buy illiquid asset."
...Should the risk of an early restructuring-with-NPV-haircut of the Greek sovereign debt materialise, and should one or more of the other Peripherals end up requiring access to the funds provided by the €440bn EFSF and/or to other parts of the €750bn pot of money put together for EA member states other than Greece, a sharp mark-down (and, in the case of a restructuring, a partial write-off) on the value at which Euro Area banks carry these sovereign debt instruments in their balance sheets looks bound to result. This could weaken the capital positions of many Euro Area banks materially.
...Euro Area banks therefore need additional capital – a lot of it. This may not be apparent from their ratios of regulatory capital to risk-weighted assets but, in our view, both the numerator and the denominator of this ratio are deeply unreliable. Many EA banks include in their definition of tier-one capital things other than tangible common equity – the only unconditional loss absorber, in our view."
"Deeply unreliable" seems to indicate that "triple A rated" debt may in fact be something far worse in reality.
Greece's Golden Visa program
