Greece is unable to repay its debts, according to Richard Bove, banking analyst at Rochdale Securities, and given that the euro zone banking system has yet to mark sovereign debt holdings to market, many banks will be forced to raise new capital.
“Even though it is clear that Greece is unable to repay its debts and its banks are probably insolvent, no European or American bank has, to my knowledge, marked the sovereign debt to market,” Bove said in a research note on Sunday.
“No country, nor the Eurozone itself, wants to take on the burdens created by profligate nations. The banking system is unwilling to dilute its earnings by selling large amounts of capital to replace the losses that will develop if the troubled countries default.”
This has allowed a number of banks to take defensive action in a bid to lessen the pain when it comes, according to Bove.
“However, there can be no doubt that the debt of the troubled countries and, who knows how many others, will be restructured. Many of these countries will never be able to repay their debt. Simply increasing their debt burdens by continuing to lend them more money is no solution," he said.
Without debt relief, Bove said, Greece and potentially a number of other countries will default.
“It is only a matter of time. The default timetable could be accelerated, however," he said. “At some point, a 2008-style run on the debt of these institutions could cause a collapse."
“The strains on the situation are too great to allow it to continue. Moreover, the lack of a clear policy to alleviate the problem, now, only exacerbates the problem. Market forces are about to do what governments will not do – i.e., withhold credit from the troubled countries and banks all over Europe. The situation is about to collapse.”
Citigroup and JPMorgan Chase have the biggest exposure to the debt crisis in the euro zone, according to Bove’s analysis of filings with the Securities and Exchange Commission, but he believes neither bank is likely to have to raise new capital.
“The biggest risk to Citigroup is not from its direct lending activities. It comes from the possibility of an extended recession in Europe and the disruption of the European financial markets. This is not predictable,” Bove said.
“It is highly likely that there will be a financial crisis in Europe that will entail defaults on sovereign debts and significant bank capital raising. There are only two banks in the United States that appear to be at risk from this potential development. The remainder of the industry is not. Thus, the declines in the bank stock prices based on fears in this area seem to be meaningfully over done” Bove said.