Caught in Greek shadow, Europe’s banks bolster capital

BRUSSELS(AFP): Caught in the shadow of a potential Greek default that has seen investors switch into risk-aversion mode, European banks are back in the hunt for funds to shore up their books.

In a major U-turn, senior EU officials conceded this past week that Europe’s banks need to raise more capital to weather the storm of the eurozone debt crisis.

EU officials had in recent weeks rebuffed repeated calls from the International Monetary Fund for a recapitalisation of European banks.

But they changed their tune after the world’s top central banks agreed on September 15 to inject liquidity into the market, amid signs some major European banks were having trouble raising dollar funding.

European Union competition commissioner Joaquin Almunia admitted that “more banks may need to be recapitalised, on top of the nine signalled in the July stress tests.” Eight failed and one did not undergo the test.

Almunia warned that “without a quick solution, the final bill will only grow bigger and banks will not be able to fulfil their key role of financing economic growth.”Some European banks have recently run into serious problems trying to borrow dollars: the US funds that normally lend to them have become reluctant to do so for fear of contagion from the eurozone debt crisis.

Since the end of May, US funds have reduced their exposure to French banks by 34.0 percent, according to Fitch Ratings.

“Capitalisation of euro area banks is relatively low, and they rely heavily on wholesale funding, which is prone to freezing during financial turmoil,” an IMF report warned.

“Trouble in a few sovereigns could thus quickly spread across Europe. From there it could move to the United States -- by way of US institutional investors’ holdings of European assets -- and to the rest of the world.”European officials have sought to reassure the markets that recapitalisation is underway.

Most banks are in the process of shoring up their balance sheets to meet tougher Basel-III international standards adopted after the 2008 financial crisis. They oblige banks to keep much more top-quality capital in reserve.

Since 2008, European banks have in total been recapitalised to the tune of 420 billion euros ($570 billion), either through state bailouts or market investment, the European Commission said on Friday.

Senior commission spokesman Olivier Bailly said the next wave of recapitalisation was already underway.

“We know now which banks must be recapitalised. We are talking with them. We are waiting for their plans,” he said.

“It is not the whole banking system that’s in danger.”However, Almunia said that rules put in place in 2008 to enable governments to rescue banks would now almost certainly be extended beyond this year.

The European Banking Authority sought to dampen speculation it was going to push the banks to move faster.

It reaffirmed that banks that failed had been given until December to submit plans to recapitalise; the 16 others until April.

Of those 16, seven are Spanish, two Portuguese, two Greek, two German, one Italian, another Slovenian and the last Cypriot.

But with their shares taking a beating on the stock markets and signs of a deepening economic slump, European banks may find it a challenge to raise to quickly raise capital from wary investors, analysts warn.

Shares in the major French banks shares have been particularly hard hit.

They have announced asset disposals to bolster their balance sheets, denying rumours they are trying to attract major sovereign wealth funds as investors.

The eurozone states, under pressure to slash deficits and debt, may be more reluctant to bail out banks than they were during the 2008 financial crisis.

The same countries that judged some banks “too big to fail” back then may now see them as “too big to bail,” Dirk Peeters, a Brussels-based analyst with KBC Securities, told AFP on Friday.

“A line needs to be drawn under Greece,” added Manoj Ladwa, a senior trader at London-based ETX Capital.

With default “the most likely option,” he said “the banks and institutions that hold the largest amount of Greek debt need to be capitalised such that they’re not impacted in a huge way.”Peeters warned that a smaller banking sector would be the inevitable result.

Not all experts, though, think it wise to take the route of bank recapitalisation.

For Sony Kapoor of Brussels economic think tank Re-Define, “the most cost-effective solution to the euro crisis is to address sovereign risks directly, not through bank recapitalisation.

“Unless sovereign borrowing costs are brought down, no amount of capital will be enough,” he told AFP.