Simon Samuels of Barclays Capital estimates that nearly €800 billion of term debt will need to be refinanced over the next 12 months alone. No doubt the new French and German commitment to recapitalising the banks, though primarily aimed at improving solvency, is intended to bolster confidence in funding markets too. Yet on past form, it is hard to believe that any master plan that emerges in November will take the measure of all the problems.
A starting point for considering the capital requirements of the banks is the International Monetary Fund’s latest Global Financial Stability Report. It puts the cost of the spillover of sovereign risk into the banking system at €300 billion. Yet the spillover is not quite the same as the likely capital requirement because the IMF’s exercise is not a stress test. It does not, for example, make allowance for the potential cost of adverse economic scenarios which might cause a deterioration in the value of loan books and corporate securities. So the required recapitalisation might be even greater.
The biggest concern must be that recapitalisation alone cannot anyway solve the problem, which is the fall in value of sovereign debt. Nearly half the €6,500 billion stock of eurozone debt is showing signs of heightened credit risk. In effect, governments and banks are locked in something dangerously close to a fatal embrace. Widening spreads on credit default swaps for Germany and France are symptomatic of the increase in governments’ contingent liabilities both in relation to the banks’ weakening balance sheets and the potential costs of bailing out weaker sovereign debtors.
In the end it is hard to see a palatable way forward for southern Europe as long as Germany is hell bent on inflicting deflation on the region for the foreseeable future. It does not want to pay the price of keeping the eurozone show on the road, but nor does it want to incur the cost of a eurozone break-up.
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