A severe economic recession could force European banks to raise up to 250 billion euros ($355 billion) and cause government borrowing requirements to rise by a fifth, according to a study by Standard & Poor's.
An S&P "stress test" of how European countries and banks would cope under a "severe economic downturn" from 2011 to 2015 estimated that 22 out of 99 financial firms it assessed would need to raise 161 billion euros.
The sample covered about 70 percent of Europe's banking sector, so the overall bank recapitalization cost would probably be between 200 billion and 250 billion euros, the analysts said.
The estimate assumes that banks would need to be recapitalized to get to a Tier 1 capital ratio of 7 percent of assets to mitigate market concerns about their solvency.
The Greek, Irish, Spanish and Portuguese banking systems are hardest hit under the hypothetical stress scenario.
European regulators are putting banks through a health check to assess how they would cope in a recession, although there has been criticism already that the test is not harsh enough — a criticism of last year's test too.
S&P estimated that government borrowing requirements would collectively increase by more than 20 percent over the five-year stress period under the scenario.
"Nevertheless, our impact analysis on 400 western European ratings indicates that the region as a whole, although battered, would likely be able to withstand this shock and rebound economically," the S&P report said.
S&P said there would be three phases to its scenario: firstly, bond yields rise; then access to debt refinancing deteriorates, especially in peripheral euro-zone economies; and finally a severe downturn would follow, hitting Greece, Ireland, Portugal and Spain particularly hard.
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