A haircut of 20% to 60% on Greek government bonds corresponds to losses of between €13 billion and €41 billion for European banks, representing 1% to 3% of their aggregate Tier 1 capital.
“In the context of the sector aggregate, this is small,” the analysts said. “By extending €91bn of refinancing facilities to Greek banks (and a further €153bn to Portuguese and Irish banks), the ECB has effectively dis-intermediated the ‘core’ banks from the periphery.”
“As a consequence, the knock-on effects of a restructuring would be milder for European banks than, say, just last year,” the analysts added.
Greek bonds have slumped this week, with two-year yields exceeding a record 22%, reflecting mounting investor expectations that Greece will renege on its debts. The government has ruled out such a move, saying it would devastate domestic banks and hammer the economy.
Any restructuring would need “pre-emptive” capital injections to avoid contagion, Goldman Sachs said.
“Greek banks would realistically require substantial additional capital to cover for incremental losses from a theoretical restructuring,” the analysts wrote. “In our view, pre-emptive provision of incremental capital would be required to stem potential second round effects, most notably, loss of creditor confidence.”
Greek debt holders who accept that a restructuring is inevitable should push for it to be executed as soon as possible, Citigroup analysts have claimed separately.
“Once debt holders fully realise that Greece cannot escape a haircut, they should accelerate the event as soon as possible,” Citigroup analysts said.
“Leaving the haircut for the future means a larger haircut for the same reduction” in indebtedness, they claimed.
Banks in Belgium, France and Germany are the most exposed to Greece, apart from Greek banks, Citigroup said.
The Association of German Public Sector Banks and Munich Re, the world’s biggest reinsurer, both said they could handle a Greek debt restructuring.
French banks could also withstand a default by a euro-area nation, according to Bank of France governor Christian Noyer.