The media buzz surrounding EU leaders’ progress on a plan to recapitalize banks is causing a stir this morning.
But don’t get too excited.
Although this is the closest European leaders have come to presenting a bank recapitalization plan — and something is better than nothing — it is actually nothing we haven’t heard about before. In fact, it is the very plan we’ve been critiquing for the last month.
EU leaders have long made clear that banks with shaky funding will first need to seek funding themselves, then from their national governments, before finally gaining access to funds from the European Financial Stability Facility.
Under such a plan, vulnerable French banks will probably not be able to access EFSF funds, further endangering France’s rating if their funding needs or losses on PIIGS assets are larger than expected.
Further, the planned €107-108 billion ($148-150 billion) level of bank recapitalization EU sources have been talking about has long been thought insufficient to adequately shore up bank financing, particularly if private bondholders have to take bigger haircuts on Greek bonds.
And with haircuts of as much as 60% being considered, at least according to Eurogroup President Jean-Claude Juncker, banks’ losses are almost certain to be larger than expected.
So don’t start celebrating at bank recapitalization yet.