Tough balance between inspiring confidence, credit crunch By William L. Watts, MarketWatch FRANKFURT (MarketWatch) — It’s a testament to the scope of the euro zone’s debt crisis that a multibillion bank recapitalization plan is described as the “easy” part of the deal being negotiated by European officials. Recapitalization is the easiest element politically, said Michael Symonds, credit analyst at Daiwa Capital Markets in London. But it’s not clear the recapitalization plan, as currently envisioned, will inspire lasting market confidence. Authorities must walk a fine line between reassuring investors that banks can handle a controlled Greek default and triggering a credit crunch that could turn a European slowdown into a double-dip recession. European officials are said to have largely reached agreement on a plan that would require around 90 lenders to boost their key capital ratio to 9%, the Wall Street Journal reported. The total amount of recapitalization is expected to top 100 billion euros ($138 billion). The €100 billion capital shortfall is based on the latest examination by the European Banking Authority, reports said. The figure emerged after euro-zone finance ministers met Saturday in Brussels, followed by a meeting Sunday of the heads of state from all 27 European Union nations. The meetings produced no breakthroughs, but saw leaders repeat a vow to finish work on a wide-ranging plan at a second summit set for Wednesday. The plan will also aim to structure an orderly Greek default and come up with a way to leverage the region’s €440 billion bailout fund. The threat of contagion The recapitalization figure itself is largely irrelevant, Symonds said, in a note, “as no attainable amount of new capital would save European banks if the contagion of the sovereign debt crisis is not definitively contained.” Indeed, talk of a hard figure for the recapitalization efforts appears premature since other key elements of the euro-zone plan remain unresolved. In particular, the lack of a final figure on the size of the writedowns that private bondholders — mostly banks — will be required to take on Greek debt holdings make it difficult to determine how much capital European banks will need, Symonds said. Private bondholders agreed to take a 21% haircut on Greek bond holdings as part of European leaders’ last attempt to come up with a comprehensive solution to the crisis in July. Since then, the further deterioration in Greece’s fiscal situation has led European officials to press for larger haircuts, with negotiations now reportedly focused on writedowns of between 40% and 60%. Banks in countries that have received bailouts — Greece, Ireland and Portugal — are said to account for around half the capital shortfall,with institutions in Germany, France, Italy and Spain also to be required to find new capital, Symonds noted. In Paris trading Monday, shares of Societe Generale SA FR:GLE +4.11% rose 4.1% and Credit Agricole SA FR:ACA +2.77% rose 2.8%, while BNP Paribas SA FR:BNP +0.69% gained 0.7%. Moody’s Investors Service last week warned that its stable outlook on France’s triple-A bond rating could come under threat due to worries about the impact of state-aided bank recapitalizations or added exposure to the euro-zone bailout fund on the nation’s public finances.

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