For more than two years banks have ignored the fact that they have one Trillion 300,000 million Euro’s of debt to refinance starting ….. Now!
This phenomenal sum is due over the next five years, with 800,000 million due this year. The amounts dwarf the combined repayments of the UK and the USA. It also does not take account of any fresh borrowing they may take on. (i.e. from stress tests)
Therefore, for those banks that underwent the stress tests, it is very providential they passed, and so few, (only six) failed.
The “stress” that bank balance sheets were put under, included losses on government bonds held by the banks. As we pointed out in the last issue, Willem Buiter chief economist at Citibank asserted in May that Greece will default, sooner or later, one way or another.
Buiter estimated that if Greece were to default now, the “haircut” on Greek bonds could be as high as thirty percent. He further stated that, if Greece defaults at the end of the year, those losses could be as high as seventy percent!
Under the stress test, presumed losses were a maximum of only 22% for Greece, and even less for Spain and other letters of the acronym. The problem is that according to information uncovered by John Dizzard at the FT, the Greek health ministry has already started restructuring its debt with Zero Coupon bonds. These have a face value for repayment, but do not carry a coupon that pays interest.
On aggregate this is an official loss of 19% for this round, and it will only get worse.
Now this may appear irrelevant to many, and you may say the bankers deserve the losses. The problem is that many banks already have taxpayer guarantees, and they will never survive the haircut.
Therefore we believe, right now, as you read, the banks are transferring this debt from the balance sheet of banks onto the public purse via the Treasury.
As we previously wrote, we calculate that a haircut on the debt owned by Royal Bank of Scotland alone, could wipe out the entire UK Treasury, foreign currency reserves.
