Societe Generale published a comprehensive report this morning on the contagion effects of a Greek exit from the euro currency to the rest of the eurozone.
One of the most sobering sets of figures: massive funding gaps in the Italian and Spanish banking systems that “would likely open up” unless the ECB were able to manage the exit process adequately.
Here are the details provided by the Soc Gen strategists:
Deposit outflows of 20-30%, as we saw in Greece, would lead to 10-20% deleveraging in Italy and 20-30% in Spain. [Net interest income] would contract again, likely by 13-22% in Italy and 18-26% in Spain. A funding gap of €200-400bn in Italy and €145-280bn would likely open up. If 20% of the deleveraging were to occur through defaults, additional loan losses of €38-72bn in Italy and €80-100bn in Spain would have to be absorbed by the banks. Finally, the substantial holdings of government debt place the banks’ equity at risk. The relative resilience and lower valuations of Italian banks, namely UCG, drive our preference for Italy versus Spain.
These numbers are scaled up for Italy and Spain based on Greece’s recent experience with deposit outflows. However, the Soc Gen strategists also note that they “would expect materially faster outflows in Italy and Spain following an unmitigated exit of Greece from the eurozone.”
Soc Gen says the size of these figures in Spain are such that “neither the banks themselves nor the Spanish state could manage.” On the size of the Italian funding gaps, Soc Gen describes them as at “a level that given the absence of of profits would require a further bank bailout.”
Here is what the emerging funding gaps would look like:
Photo: Société Générale