The document analyzes the potential capital needs of German and French banks if Greece defaults on its sovereign debt by 50-75%. It estimates that a 50-75% Greek default would require €36-40 billion in new capital, with €9.7-14.4 billion for Germany and €26.1-25.6 billion for France. Factoring in a 100% default on Greek banks and a 15% default in the Greek private sector, it estimates total capital needs for German and French banks could be over €50 billion, making the rumored €100 billion recapitalization of European banks a reasonable estimate to cover Greek losses alone.

1. http://marketsandbeyond.blogspot.com/
http://www.pcgwm.com/
European banks’ recapitalization
When the EBA stress tests on 90 European banks were published in July, I titled them a mockery. I
conducted my own analysis according to a 50% and 75% haircut on sovereign debt in
PIIGS countries to abide by the 9.5% core capital to be reached by 2019 according to
Basle III rules (many banks said they would get there well ahead of time): this analysis produced
the numbers I mentioned in several articles on this blog.
In the table below, let’s look at German and French banks’ exposure to the Greek sovereign debt
(being the main holders, I do not include other banks):
A 50-75% Greek default would result EUR 36 and 40 billion new capital required, split
1/3 for Germany and 2/3 for France. This does neither take into account their exposure to the
banking and private sector nor guarantees/commitments/derivatives (including CDS). The German
situation is not much worse with respectively EUR 9.7 billion additional exposure (including EUR 2.1
billion with Greek banks) and EUR 5.3 billion; French banks’ are in a much more difficult position
with EUR 43.5 billion (including EUR 1.6 billion for banks) and EUR 8.3 billion.
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2. http://marketsandbeyond.blogspot.com/
http://www.pcgwm.com/
To be fair, these numbers reflect the situation at the end of December 2010 and French banks
have significantly reduced their exposure on their Greek sovereign debt during H1
2011: BNP Paribas from EUR 5 billion to EUR 3.5 billion and Société Générale from EUR 2.7 to
EUR 1.9 whilst producing a net 6 months result of EUR 4.7 billion and EUR 1.6 billion, so enough to
absorb a 100% default. However, as for Dexia that went under mainly because of its exposure to the
non-sovereign credit book, I do not know what the quality of the private book is.
Let’s add a 100% default on Greek banks and 15 % on the private sector (guarantees and
commitments included but not derivatives), the banking needs required to abide by Basle III
rules is north of EUR 50 billion for German and French banks that were subject to the EBA
stress test.
The total number of EUR 100 billion rumored to be in the starting blocks to
recapitalize European banks is probably right on a Greek basis alone. In order to weigh
the minimum possible on government budgets already under dramatic strain, this recapitalization
should be undertaken via profits, cutting dividends to zero and reducing bonus payments (say by the
same amount as the Greek default). It is however far from addressing the rest of BIGSPIF
sovereign risk.
Nevertheless, the EUR 100 capitalization does not address the core of the matter: the sovereign
insolvency and lack of economic competitiveness. More on this in a forthcoming article: France - EZ
weak link.
BIGSPIF: Belgium, Ireland, Greece, Spain, Portugal, Italy, France
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