* We test the impact of a 50% Greek haircut *
Cypriot banks would stay the right side of Basel II even with a 50% haircut of Greek sovereign debt but would drop below the stricter level set for the EU-wide stress tests, according to our analysis.
Cypriot banks have been under the spotlight lately, with Moody’s downgrading the three major banks on March 2 and the EIU rating them as the second riskiest in the eurozone in a report released last week.
Standard & Poor’s downgraded the Republic of Cyprus for the second time in six months on March 30, which means the banks are likely to follow. Only Fitch has remained more or less on the sidelines, with Cyprus on a negative watch but not yet downgraded.
There are two main reasons for the downgrades: the banking sector and the public finances.
Expectations of a Greek default, negotiated or otherwise, are now growing. The EIU’s baseline forecast is a 42% haircut by 2013, Reuters last week cited an academic expecting a haircut of 50% and Standard and Poor’s mentioned a haircut of 50%-70%.
While analysts worry what that will mean for the banks’ bottom line, they also lack of faith in the Cypriot government’s deficit-cutting programme.
Why does this affect the banks? Because if a Greek default led local banks to need capital injections to keep them solvent, a deficit-ridden government might not have the funds, or the access to financial markets, to prop them up.
In the next few weeks, the newly created London-based European Banking Authority (EBA) will be running an EU-wide stress test similar to the one conducted last year by the Committee of European Banking Supervisors (CEBS).
However, this time the test will be tougher. Banks will be required to keep their Core Tier 1 ratios above 5% (the Basel II minimum is 4%). However, the results will not be known until June, which might be too long to wait if you expect a Greek default any time now.
The Financial Mirror, in cooperation with Sapienta Economics, has therefore decided to run its own basic test, based on published data of the three banks, as well as additional information kindly provided to us.
– How much have the banks lent to Greece?
– The impact of a 50% haircut.
– Probable scope for more capital issues.
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