Euro banks have $410 bn credit risk

The European debt crisis has generated as much as $410 billion in credit risk for European banks, the International Monetary Fund said, calling for capital injections to reassure investors and support lending.

Political squabbling in Europe over ways to fight contagion and delays in implementing agreed measures are raising concerns about the risk of defaults by governments, the IMF said. Banks in turn face funding challenges because of investor concern about their potential losses from government bonds they hold, with some relying heavily on the European Central Bank for liquidity, it said.

"A number of banks must raise capital to help ensure the confidence of their creditors and depositors", the IMF wrote in its Global Financial Stability Report released on Wednesday. Without additional capital buffers, problems in accessing funding are likely to create deleveraging pressures at banks, which will force them to cut credit to the real economy.

The Washington-based IMF yesterday cut its global growth forecast and predicted 'severe’ repercussions if policy makers fail to stem the debt turmoil that’s threatening to engulf Italy and Spain. Bank recapitalisation, through public injections if necessary, should come in addition to credible strategies by governments to reduce their public debt, the IMF said on Wednesday.

The ECB and peers in the UK, Switzerland, Japan and the US last week said they’ll provide unlimited three-month money to lenders in three tenders starting October.

That was after funding dried up for European banks in general, and French lenders in particular, amid concern Greece is headed for a default.

Credit Agricole SA (ACA) and Societe Generale SA had their long-term credit ratings cut one level this week by Moody’s Investors Service, which cited their reliance on short-term funding and Greek exposure.

The fund said its assessment of the potential credit risks of European banks isn’t a calculation of their capital needs, which would require a full-fledged stress test” It said its analysis was based on published data from the European Banking Authority’s stress test and Bank for International Settlements figures.

The IMF also called on the US and Japan to craft fiscal plans for the medium term, particularly given the many adverse global economic and financial repercussions that would follow from failure to adequately deal with US fiscal problems.

Emerging Markets
Emerging-market banks are not sheltered from the consequences of weaker global growth, the IMF said. It estimated that their capital adequacy could be dented by six percentage points under a scenario that combines several shocks.

Calls by IMF Managing Director Christine Lagarde to recapitalise European banks where shunned by officials from Germany to Spain, with ECB President Jean-Claude Trichet describing the fund’s methodology on capital as different from his own institution’s.

Analysts at Credit Suisse Group AG in a September 15 research note estimated that European banks may have a capital deficit of euro 165 billion at the end of 2012 ,given higher regulatory capital demands and funding markets requiring larger capital cushions.

The IMF analysis measured the size of spillover on banks from credit-related strains in the bond markets of Greece, Ireland, Portugal, Belgium, Italy and Spain and used spreads on credit default swaps.

The IMF said banks’ spillover from sovereign debt alone amounts to about euro 200 billion. Adding banks’ holdings of bank assets whose value has also fallen in the crisis countries brings the total as high as euro 300 billion.