Europe Needs Its Own TARP as Debt Crisis Deepens, Marathon Says

Europe will be the “mother lode” of distressed investing as the region seeks to avert defaults by Greece, Ireland and Portugal that may leave its banks $500 billion short of capital, according to Marathon Asset Management LP’s Bruce Richards.

Europe’s leaders will need to pump as much as $400 billion into bank balance sheets through a measure similar to the Troubled Assets Relief Program in the U.S. as it seeks to stem the crisis of confidence that is pushing borrowing costs of countries including Italy and Spain to euro-era records, Richards said yesterday at a conference in New York organized by CNBC and Institutional Investor.

“What’s really required is a TARP for Europe,” said Richards, who runs the $10 billion New York-based hedge fund. “The banking system in Europe is under-capitalized by as much as $500 billion today, and that’s if things don’t get worse.” The most banks may be able to raise in equity capital markets during the next 12 to 18 months is $100 billion, he said.

TARP, a $700 billion program, was started in 2008 to provide capital injections to banks after the collapse of the U.S. housing market and the bankruptcy of Lehman Brothers Holdings Inc.

The cost of protecting against defaults by European banks soared to records this week amid concerns that they aren’t holding enough capital to cushion against losses from plunging government bond prices.

The Markit iTraxx Financial Index, linked to the senior debt of 25 banks and insurers in Europe including France’s Societe Generale SA and BNP Paribas SA, jumped to an end-of-day record of 314 basis points on Sept. 12 and has more than doubled since the end of June, according to JPMorgan Chase & Co. data.

‘Come Clean’

The measure fell 29 basis points to 285 as German and French leaders expressed support for Greece to remain in the euro monetary union.

Banks “haven’t come clean” on the value of Greek debt that they’re holding,” Boaz Weinstein, founder of the $4.2 billion investment firm Saba Capital Management LP, said on the panel. “There are plenty of European banks that have Greek debt marked at or near par,” he said, adding that it’s preventing investors from having the confidence to invest in the institutions.

Saba has bought one-year Greek debt at 38 cents on the dollar, a price he said factors in at least a 75 percent chance of default, Weinstein said.

Stemming the plunge in government debt prices may cost European governments and the International Monetary Fund between $2 trillion and $3 trillion and will require a restructuring of Greece, Ireland and Portugal, Marathon’s Richards said.

“You need to have a line in the sand,” he said. “You’re not going to risk Spain or Italy or Belgium. You need a big enough war chest of capital to do that.”

Marathon told investors in mid-June that it’s evaluating the purchase of portfolios of $1 billion or more of real estate and corporate loans from banks in Portugal, Ireland, Spain, the U.K. and Italy as they are forced to sell debt to raise capital, according to a presentation to clients.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE