European banks brace for Greek default

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European banks brace for Greek default

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Greece’s debt problems continue to dominate dealing on the world’s financial markets.

Europe’s bourses made big gains on Monday, but investors are vacillating between hoping that the Europeans are finally going to fully address the crisis and fears that they will not be able to contain it.

Euro zone officials have played down reports of possible plans to halve Greece’s debts and then recapitalise European banks which would suffer big losses from such a move.

Analyst Francois Chaulet of Montsegur Finance in Paris said: “What it seems is being talked about right now is a much larger cut in the repayments of Greek debt, 50 percent of what has been borrowed, rather than the earlier proposed 20 percent plus, that would have pretty major consequences for the financial sector.”

Despite the lack of detail, optimism pulled the shares of banks and insurers higher. Italian banks were among the top gainers.

But market watcher said there was likely to be much more volatility for some time.

We spoke to Guido Ravoet, the Chief Executive of the European Banking Federation, about the uncertainties facing the financial sector.

euronews: “The scenario of Greece defaulting on its debts is looming, and it could come as early as this week. That would mean European banks losing between 21 and 50 percent of the value of the Greek government bonds they are holding. Mr Ravoet, as head of the European Federation of Banks, can you tell us if Europe’s banks are really prepared for this difficult scenario?

Guido Ravoet:

“I think we really need immediate and clear action by the authorities to thoroughly address the problem so that the financial markets and investors regain confidence. European banks can afford this loss as they have already reduced their exposure to Greek sovereign debt.

euronews: “There is a growing concern on the part of investors about the strength of the European banking system. There are lots of calls for recapitalisation, but at what price and how should that be done?”

Guido Ravoet:

“European banks are responding very well to the demands on them – the capital requirements – in recent months they also passed a very severe stress test that included a scenario with losses from sovereign debt. European banks came through these stress tests very well and therefore there is no reason to worry about the solvency and the strength of Europe’s banks. With regard to recapitalisation, that will be something that the markets will decide.”

euronews: “The financial markets remember US bank Lehman Brothers’ bankruptcy in September 2008 and so do consumers. As Chief Executive of the Federation of European banks can you assure us that European banks are not at risk of going bankrupt?”

Guido Ravoet:

“I think the Lehman Brothers scenario couldn’t happen again because, since then, there have been contacts at the international level and at the European level and systems have been put in place; there are regulators and supervision for the banks and financial markets at the European level. All this didn’t exist when Lehman Brothers went bankrupt. I think we’re on the right track, but it’s true that we should develop the means to make and implement decisions. Because in the end, that’s the problem, the delay in the authorities finally deciding to implement these measures: the length of time that takes should be reduced in the future.”