EU told to repair banks before Greek restructuring

Financial Times
May 26, 2011

The European Union should repair its banks before attempting to restructure Greek debt, Peter Fisher, head of fixed income for BlackRock, the largest asset manager, has warned.

The European authorities “keep confronting this dilemma of the need to restructure debt for the debtors’ sake, and then the consequences for the European financial system if they do,” said Mr Fisher in a video interview for FT.com.

The answer was to make the banks strong enough to withstand the hit, he said. “But the Europeans are having a very hard time coming to that conclusion, so they keep running up against this challenge, and then pulling back from it, over and over again.”

European banks are large holders of sovereign debt, so a fall in the value of their holdings eats into capital, reducing their ability to lend to companies and individuals. This in turn could hinder economic growth in countries still struggling to recover from recession.

Financial institutions have begun to address the need for fresh capital. Since bank stress tests were announced last July, European banks have raised €56bn in total, including €34bn this year, according to Morgan Stanley. A failure to inject enough capital into the banking system before restructuring the sovereign debt of the eurozone’s so-called peripheral economies could lead to problems spreading beyond Greece, said Mr Fisher.

“What worries me is that the net of all the policies and actions they’re likely to take will lead to aggregate policy being too tight in Europe,” he added.

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