David Prosser: In search of capital for Europe's banking system


Click to follow

Outlook So where exactly might we find the "private sources of capital" to which Jose Manuel Barroso believes European banks in need of recapitalisation should turn first? If he imagines the banks of the eurozone, stuffed to the gills with the sovereign debt about which the world is so worried, are going to get rights issues away to their shareholders, he is going to be disappointed. Nor is there much sign of any interest from other types of private investor – the sovereign wealth funds of the Middle East, for example, are not beating a path to the doors of these banks.

No, the task of recapitalisation is going to fall squarely on the taxpayer, one way or another. Mr Barroso suggests the member state-financed European Financial Stability Facility should be the backstop of choice for banks unable to raise capital privately, at least until the European Financial Stability Mechanism is ready, but that is a political call. The reality is more likely to be that most countries bail out their banks directly.

The question is how much recapitalisation is needed. Remember, the European Banking Authority, which Mr Barroso expects to make that judgement, thought as recently as a few months ago that the vast majority of banks did not need a single euro more. Though the EBA's board met earlier this week, we do not know what it is now thinking – or even what sort of models it is using to make its calculations. What level of Greek default is the EBA basing its assumptions upon? Is it also factoring in defaults from other nations?

As ever, the tricky decisions are kicked a little further down the road – which is why, of course, investors don't want to touch Europe's banks with a barge-pole. And while Mr Barroso and his colleagues remain so unprepared to offer hard and fast detail, they never will.