EUROPEAN bank analysts are now fully immersed in a game of spot the weakest link, a game that is getting bank chiefs rather hot under the collar.
Josef Ackermann, chief of Deutsche Bank, is so incensed that he slammed the EU’s bank recapitalisation plan publicly yesterday.
“It’s not the capital resources of banks that are the problem but the fact that sovereign debt has lost its status as a risk-free asset,” he huffed, calling the scheme “counterproductive”.
He has a point: the biggest reason banks need more capital is that many of the “safe” government bonds they stocked up on have suddenly become junk assets as states fail to control their spending.
But the bonds are not going to go back to being “safe” in a hurry, which means write-downs loom.
The question is how much capital regulators will now demand and in what time-frame. Morgan Stanley estimated that in a worst-case scenario, Deutsche itself could need €7.6bn in extra cash to pass new stress tests, while Barclays could need €11bn and Unicredit a whopping €12.5bn. That means one of two things: tapping investors or ditching assets as fast as possible.
Investors are reluctant to shell out. But Europe is already awash with “non-core” assets that banks are reluctant to sell for large losses.
The fact is, however, that something’s got to give.