Spanish and Greek banks under the spell

29.05.2012 - 11:29

Despite the news about central banks in the US, Britain, Switzerland and elsewhere erecting firewalls to protect their home financial systems from a possible ‘Grexit’ (Greek exit) from the Eurozone, the truth is that apart  from the bank and corporate default domino such a eventuality may trigger, the very fact of a Eurozone country's exit will irrevocably put a spell on the single currency, and undermine the future of the entire project of the single European money.

The immediate cost of such financial Armageddon will be at least one trillion euro, according to estimates by the International Institute of Finance, an organisation regrouping the major western banks. In view of this dreadful prospect the medium term cost to fortify the Eurozone banking system, the safe anchor of the euro area, does not exceed €100 billion, enough to fortify the Spanish and the Greek commercial and investment banks.

On top of that, those €100bn from Eurozone taxpayers will not be lost in a probable future default domino, but are to be invested in the equity of the Greek and the Spanish banks. Not to forget that Greece's troika lenders (EU-ECB-IMF), have already agreed to recapitalise the Greek banks with anything up to €50bn, in the form of EFSF bonds.

As for the Spanish banks, the Madrid government has already said it will recapitalise Bankia, the fourth largest banking group of the country with an additional €19bn, on top of the €4.5bn it has injected in it. The Spanish Prime Minister, Mariano Rajoy, said yesterday, Monday 28 May, that his country is capable of countering its home banking crisis, but he added that Eurozone has to be more active in protecting the euro. He did not elaborate further on this last comment.

In any case the financial needs to recapitalise the other three Spanish banks in dire straits from the country's real estate melt down are estimated to be at least €30 billion. The Madrid government is thought to examine the recapitalisation of the country's banks with the issuance of home sovereign bonds, which will be handed to the banks.

Brussels sources say that Spain is asking for the EFSF to contribute. With those bonds as collateral the banks will continue to borrow from the European Central Bank, thus covering their liquidity needs. The same is true for the Greek banks, but in their case the bonds have already being issued by the EFSF and according to information from Athens were transferred yesterday Monday 28 May to the four largest home banks. If the Greek and the Spanish banks are fortified in this way, then the Italian banking system will be able to take care of its own problems.

At this point, it should be noted that neither the Greek nor the Italian banks are under pressure from toxic real estate lending. Their only problem is a huge portfolio of government bonds. In any case the Brussels authorities are monitoring the situation in Spain and Greece very closely. After the Greek and the Spanish banks are recapitalised with sovereign bonds from the EFSF and the Spanish exchequer, then the ECB will take over and cover their liquidity needs with cheap loans. Once the Greek and the Spanish banks are recapitalised and seen safe the troika of EU-ECB-IMF will be able to negotiate from a strong position with the next Greek government having a lot of manoeuvring space.

Not forgetting that a win of the leftist group Syriza in the 17 June Greek election is highly probable. In this case a Syriza led government will put the troika in the dilemma of either relaxing the austerity programme imposed on the country or Athens will stop paying its maturing debts. If however the Greek and Spanish banks are on the safe side, such a 'blackmail' will be groundless. The repercussions of a Greek government default will be limited and the Athens government will be obliged to apply the austerity diet and remain in the Eurozone.