October 5, 2011
Whatever mechanism European politicians come up with for the forced recapitalisation of the continent’s banks, it will need to be sizeable. If analysts are right, €200bn or more will be needed to boost banks’ capital reserves to credible levels after applying “haircuts” on the value of the sovereign debt they hold in the most troubled eurozone nations.
This is a far cry from the €2.5bn shortfall that the European Banking Authority, the pan-EU regulator, identified less than three months ago with regard to just eight lenders – largely because the EBA’s July stress tests were barred by the European authorities from countenancing sovereign defaults.
As market sentiment has worsened, European politicians, regulators and some bankers have gradually come to believe that the key to stopping the rot may be higher levels of capital. With Greece’s sovereign finances looking shakier, and the credit rating downgrade of Italy on Tuesday night, the prospect of sovereign debt restructurings – and therefore losses for holders of that debt – are mounting steadily.
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