Tags: german | banks | greek | debt

German Banks Have Cushion on Greek Writedown

Sunday, 23 Oct 2011 07:05 PM

German banks may be able to mark up their bund holdings to help cushion the effect of a writedown on Greek government debt as part of a rescue for the country, according to people briefed on the matter.

The European Banking Authority tested European lenders to see how much money they’ll need after writing down bonds from countries such as Greece and marking up stronger debt including that of Germany, said two people who asked to remain anonymous as the matter is private. German banks may need about 5 billion euros ($9.6 billion) in fresh capital to reach core Tier 1 capital of at least 9 percent, based on preliminary estimates by the EBA, the people said.

European politicians met in Brussels yesterday seeking a breakthrough over how to stamp out the Greece-led debt shock that threatens to tip the world into a recession. They may ask bondholders to take losses on Greek debt to help rescue the country and ask lenders to raise about 100 billion euros in capital by mid-2012 to boost their resilience, according to two people briefed on the matter.

The 305.5 billion euros of German public sector debt owned by 12 of Germany’s largest lenders at the end of 2010 dwarfed their 7.64 billion euros of Greek public debt, according to Bloomberg calculations based on EBA data released in July. The banks have since written down the value of some Greek bonds.

‘Appropriate Haircut’

Germany’s bad banks, backed by the state to prevent the collapse of Hypo Real Estate Holding AG and WestLB AG during the credit crisis, are not included in that list. Hypo’s FMS Wertmanagement held 8.76 billion euros in Greek sovereign investments and loans as of June 30, while WestLB’s Erste Abwicklungsanstalt owned 1.21 billion euros.

Landesbank Hessen-Thueringen opted out of the stress tests released in July after a dispute with the regulator over capital definitions.

German lenders can shoulder an “appropriate haircut” on Greek government bonds, the BdB Association of German Banks said yesterday. Should individual banks need additional capital on other grounds, the government should discuss that with the companies, the Berlin-based lobby group said in an e-mailed statement.

The German Finance Ministry briefed lenders on Oct. 21 on points the EBA is considering in a second round of financial strength testing this year, one of the people briefed on the matter said. Losses of 50 percent on Greek debt are likely as part of the rescue, said the person.

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