October 21, 2011 / 3:18 AM / 7 years ago

RPT-IFR-S&P updates systemic stress scenario for Western Europe banks

(Repeats to widen distribution)

NEW YORK, Oct 20 (IFR) - Under a hypothetical double-dip recession scenario, coupled with an interest rate shock, 21 of 47 Western European banks sampled by Standard & Poor’s would need to be recapitalized at a total cost of about EUR91bn, the agency said on Thursday.

The rating agency updated the systemic stress scenario analysis for Eurozone banks that it first published in March, augmenting it with two more severe scenarios that are not based on its current assumptions.

The new analysis covers the rater’s base-case projections — which is very low growth for the Eurozone — and added a double-dip recession scenario, as well as a hypothetical double-dip recession on top of an interest rate shock, spanning four years from 2011 to 2014.

S&P also looked into the scenarios that might cause the effectiveness of the institutional support mechanisms from the EU and International Monetary Fund (IMF) to become strained.

Under its double-dip/interest rate shock scenario, the agency said that there would be a EUR287bn gap between the lending capacity of the EU and IMF. The rating agency also estimates that borrowing requirements would reach the IMF’s EUR250bn lending limit in 2013 and the new European Stability Mechanism’s (ESM’s) EUR500bn limit in early 2014.

The sample of banks in need of support represents between 60% and 85% of the banking systems of Spain, Portugal, Italy and Greece. The total estimated recapitalization costs for these countries would range between EUR10bn and EUR50bn.

Additionally, the double-dip recession scenario would likely see Portugal downgraded by two notches into the speculative grade category of ‘BB’ from ‘BBB.’

Italy and Spain would likely be downgraded by two notches to ‘BBB+’ from ‘A’, and to ‘A+’ from ‘AA-‘, respectively, because of a further deterioration of their fiscal performance and debt positions.

In addition, under this scenario, France would be downgraded to ‘AA+’ from ‘AAA’ while Ireland would downgraded by one notch to ‘BBB.’ The ratings on Germany and other Western European countries would likely not be affected by this scenario.

Defaults on corporates under the double-dip and interest rate shock combination would likely increase to between 10-13%, S&P said, in line with the peak default experience in Europe in 2009 and 2002. (adam.tempkin@thomsonreuters.com and charles.williams@thomsonreuters.com)

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