Greek debt restructure may trigger bank recapitalisations

A restructuring of Greek public debt would likely have widespread repercussions for the eurozone's banking system, including a new round of banking recapitalisations, a Reuters poll showed on Wednesday.

With ratings agencies warning against even a voluntary rescheduling of Greece's debt, the latest poll of economists and fixed income strategists showed restructuring would heap pain on the eurozone's banking system.

The survey, conducted as part of the Reuters monthly bonds and money markets poll, asked respondents to pick the likeliest consequences for money markets of a Greek debt restructuring.

Fourteen of 21 respondents thought a restructuring would trigger a recapitalisation of euro zone banks, while the prospect of banks becoming less willing to lend in unsecured money markets also received 14 votes.

"Any restructuring at all, whether voluntary or involuntary, will lead to a big wave of risk aversion," said Philip Shaw, chief economist at Investec.

"It would erode the capital bases of banks particularly in Greece, but to a significant extent in France and Germany."

Shaw pointed to the potential for a systemic crisis involving banks exposed to other institutions that hold Greek debt, with the likelihood being that a number of banks could need recapitalising in the event of a restructuring.

While most analysts think some sort of debt restructuring is now inevitable, Greece must first face a 13.4 billion euro funding crunch in June.

The country desperately needs to secure a new tranche of EU/IMF aid to cope with it, but failure to find political consensus for new austerity measures in Greece threatens this goal.

Moody's ratings agency on Tuesday warned of a chain reaction of severe consequences for the 17-nation eurozone if Greece is allowed to default.

Money market impact

The poll showed just over half of the respondents thought a restructuring would result in a minor or significant widening of

BOR/OIS spreads, which measure liquidity stress by showing the difference between interbank rates and expected central bank rates.

While short-term dollar funding costs looked largely stable in Asian trade on Wednesday, traders warned borrowing costs could surge if the flow of bad news from the euro zone picks up.

Still, a rise in short-term money market rates, a decreased willingness to lend in the repo market and banking defaults were all seen as less likely consequences of a Greek restructuring.

No-one thought money markets or banks would survive a restructuring without some ill effects.

"We take the view that a sovereign debt restructuring will take place at some point," said Investec's Shaw.

"If it's three or four years' time, then that gives other economies the opportunity to get their fiscal houses in order.

If it's near term, our conclusion is: Don't go there."

The results of the poll were as follows:

Which of the following effects do you see on money markets stemming from a Greek debt restructuring:

(Please select a maximum of 3 options)

OPTION VOTES

Decreased willingness to lend in the unsecured market 14

Recapitalisation of euro zone banks 14

Minor or significant widening in BOR/OIS spreads 11

Decreased willingness to lend in the repo market 6

Minor/significant rise in short-term money market rates 6

Banking defaults 4

None 0