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Europe's banks need €372bn, says study

Thursday 20 October 2011 - by Andrew Hickley

The EU banking system needs to be recapitalised by up to €372bn ($514bn) as part of a plan to end the crisis in the eurozone, a leading think tank has warned.

The most feasible option to tackle the sovereign debt crisis would involve a 60 per cent restructuring of Greek debt, moving the country back towards a sustainable debt, Open Europe said in a report released on Wednesday.

Greece's second bailout should be scrapped, it says, allowing for a smaller €45bn ($62bn) pot to be used to ensure a significantly reduced share of the risk for EU taxpayers. The bailout in turn should be split between EU countries and the IMF.

In addition, Open Europe says that Portuguese debt should be given a 25 per cent writedown, maintaining the country's debt sustainability despite its low growth prospects, while a 15 per cent haircut on Irish debt should be considered - but could potentially be avoided.

Banks would then need to face "serious stress tests" over their ability to reach at least 8 per cent tier one capital thresholds that would help stave off contagion from these writedowns.

The tests would also have to mark down holdings of Italian and Spanish bonds to current values, effectively slashing 20 per cent off their value, the report says, to ensure there are "no more surprises lurking round the corner".

It calcualtes that a total of 65 EU banks would fail this "serious" stress test. The EU banking system would need to be recapitalised by between €260bn ($359bn) and €372bn as a result, depending on whether an 8 or 9 per cent capital threshold is applied.

"Ensuring the stability of the European banking sector is vital for the survival of the eurozone and if Europe is to avoid a long and painful recession," the report says.

"As has been touted by Germany and, recently the European Commission, a three-step plan for recapitalising Europe's banks remains the most feasible option: private sector funding, national funding and EFSF funding as a last resort.

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