Bloomberg News

German Banks’s Bunds Said to Limit Losses on Greek Debt

October 24, 2011

(Updates to add comments from banking association on capital needed by German lenders from second paragraph.)

Oct. 24 (Bloomberg) -- German banks may be able to mark up their bund holdings to help cushion the effect of a writedown on Greek government debt as part of a rescue for the country, according to people briefed on the matter.

The European Banking Authority tested European banks to see how much money they’ll need after writing down bonds from countries such as Greece and marking up stronger debt including that of Germany, said two people who asked to remain anonymous as the matter is private. German lenders may need 5.5 billion euros ($7.6 billion) in fresh capital, according to Christian Brand, president of Germany’s VOeB association of public banks.

European politicians met in Brussels yesterday seeking a breakthrough over how to stamp out the Greece-led debt shock that threatens to tip the world into a recession. They may ask bondholders to take losses on Greek debt to help rescue the country and ask lenders to raise about 100 billion euros in capital by mid-2012 to boost their resilience, according to two people briefed on the matter.

Brand said today at a press conference in Frankfurt that the country’s lenders will need less capital than speculated.

‘Learned From Crisis’

“That shows very clearly, and in a European comparison, that German banks learned from the crisis and have significantly improved their solidity and crisis resistance in past years,” he said.

Brand said he doesn’t know what share Germany’s public banks make up of the 5.5 billion euros needed by the country’s lenders. He didn’t specify where he obtained the information.

The 305.5 billion euros of German public sector debt owned by 12 of Germany’s largest lenders at the end of 2010 dwarfed their 7.64 billion euros of Greek public debt, according to Bloomberg calculations based on EBA data released in July. The banks have since written down the value of some Greek bonds.

Germany’s bad banks, backed by the state to prevent the collapse of Hypo Real Estate Holding AG and WestLB AG during the credit crisis, are not included in that list. Hypo’s FMS Wertmanagement held 8.76 billion euros in Greek sovereign investments and loans as of June 30, while WestLB’s Erste Abwicklungsanstalt owned 1.21 billion euros.

Landesbank Hessen-Thueringen opted out of the stress tests released in July after a dispute with the regulator over capital definitions.

Greek Haircut

German lenders can shoulder an “appropriate haircut” on Greek government bonds, the BdB Association of German Banks said yesterday. Should individual banks need additional capital on other grounds, the government should discuss that with the companies, the Berlin-based lobby group said in an e-mailed statement.

German Deputy Finance Minister Hartmut Koschyk told reporters today he’s “confident” the country’s banks will have ample capital to withstand a worsening of the euro region’s sovereign debt crisis.

The ministry briefed lenders on Oct. 21 on points the EBA is considering in a second round of financial strength testing this year, one of the people with knowledge of the matter said. Losses of 50 percent on Greek debt are likely as part of the rescue, said the person.

Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said today talks on private-sector involvement in a second aid package for Greece are focusing on losses of as much as 60 percent for bondholders.

--Editors: Stephen Taylor, Frank Connelly

To contact the reporters on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net; Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net


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