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Slim Fallout Seen for Europe Banks

LONDON—Top European banks will face relatively modest losses under the new Greek bailout plan agreed to Thursday, according to a Wall Street Journal analysis of bank stress-test disclosures.

The 90 large European banks that were subjected to European Union stress tests could face total losses ranging from €7 billion to €14 billion ($10 billion to $20 billion), the analysis found. Those losses stem from a provision of the €109 billion bailout that would swap Greek government bonds that come due between now and 2020 in exchange for new securities that don't mature for decades.

The expected losses, nearly two-thirds of which are concentrated among Greek banks, are far smaller than many analysts and investors had feared. Concerns about banks suffering severe losses if Greek defaulted on its debt have been ricocheting around the Continent for more than a year. But the losses likely to be realized under Thursday's bailout will hardly dent most banks' capital buffers.

The smaller scale of losses is partly because the expected hits to the bonds' face values—ranging from losses of 10% to 21%, depending on how they are calculated—are mild compared with the so-called haircuts of 50% or more reflected in trading prices of Greek bonds that analysts had built into their projections.

They warned that Thursday's bailout deal might simply be the first in a string of sovereign restructurings that could saddle holders of European government debt with increasingly hefty losses.

The surprisingly modest bank losses in Thursday's Greek bailout also are because of the way the deal was structured.

Bonds that mature after 2020 won't be exchanged. That allowed a handful of giant banks, which are holding billions of euros of Greek bonds that mature in more than 10 years, to dodge a potentially costly bullet, according to the Journal analysis. Banks, including Germany's Commerzbank AG, Belgium's Dexia SA and France's BNP Paribas SA, could have seen their likely losses swell by hundreds of millions of euros apiece if later-maturing bonds were included.

The losses on bonds that will be exchanged under the bailout are likely to start showing up when banks report their midyear financial results in coming weeks, analysts say.

In Greece, the six banks subjected to the EU's recent stress tests are collectively holding a total of about €43 billion of Greek government debt that matures in the next 10 years, according to the Journal's analysis. That could translate into losses of more than €9 billion.

Outside Greece, French and German banks are among the biggest holders of Greek sovereign debt and therefore appear likely to absorb the greatest losses under Thursday's bailout agreement, according to the Journal's analysis and independent analysts. French banks could face a total of up to €1.4 billion in losses, while German lenders could see €843 million. Read more at professional.wsj.com

 

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