Even if Greece gets its second bailout and avoids default, its problems are far from over.
The key vulnerability is the banking system. For all the inevitable focus on possible capital shortfalls, the bigger immediate challenge is liquidity and whether the banks have sufficient funding to support a recovery. This will depend on more European support.
Sure, bank capital is a worry. The average core Tier 1 capital ratio for the five major lenders is about 9%. That may not be adequate to absorb a future reduction in value, or haircut, to Greek government bonds. Gross exposure to government bonds varies between 72% of equity at Marfin Popular Bank and 218% at National Bank of Greece. If the value of all outstanding government bonds was cut by 40% in 2013, Greek banks will need a combined €8.4 billion ($12.1 billion) to hit an 8% core Tier 1 ratio on a Basel III basis, according to UBS.
By SIMON NIXON
WSJ
