Greece Default Hit on Banks Cushioned by ECB, Goldman Says

The impact of a Greek debt restructuring on non-Greek European banks would be “milder” now than a year ago thanks to European Central Bank loans, according to Goldman Sachs Group Inc. analysts.

A so-called haircut of 20 percent to 60 percent on Greek government bonds corresponds to losses of between 13 billion euros ($19 billion) and 41 billion euros for European banks, Goldman Sachs banking analysts led by London-based Jernej Omahen said in a research note today. That represents 1 percent to 3 percent of their aggregate Tier 1 capital, they said.

“In the context of the sector aggregate, this is small,” the analysts said. “By extending 91 billion euros of refinancing facilities to Greek banks (and a further 153 billion euros 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 today than, say, just last year,” the analysts added.

Greek bonds have slumped the past week, with two-year yields exceeding a record 22 percent, reflecting mounting investor expectations that Greece will renege on its debts. The government in Athens has ruled out a restructuring, saying it would devastate domestic banks and hammer the economy.

Greek debt holders who accept that a restructuring is inevitable should push for it to be executed as soon as possible, Citigroup Inc. analysts said in a separate note today.

‘Accelerate the Event’

“Once debt holders fully realize that Greece cannot escape a haircut, they should accelerate ‘the event’ as soon as possible,” Citigroup analysts led by Stefan Nedialkov said in the note. “Leaving the haircut for the future means a larger haircut for the same reduction” in indebtedness, they said.

Banks in Belgium, France and Germany are the most exposed to Greece apart from Greek banks, Citibank said. The Association of German Public Sector Banks and Munich Re, the world’s biggest reinsurer, both said this week that they could handle a Greek debt restructuring. French banks could withstand a default by a euro-area nation, Bank of France Governor Christian Noyer also said this week. German insurers would overall be able to handle a haircut, Handelsblatt reported today, citing figures from Germany’s Finance Ministry.

Greek Recapitalizing

As much as 80 percent of Tier 1 capital at Greek banks would be wiped out if there was a 60 percent haircut, the Goldman analysts said. They 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.”

To contact the reporter on this story: Boris Groendahl in Vienna bgroendahl@bloomberg.net

To contact the editor responsible for this story: Angela Cullen at acullen8@bloomberg.net

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