In a double-whammy of downbeat dystopian discussions, GMO and Kyle Bass are active on the inevitability of Europe's demise. Perhaps that is too strong but the two are focused directly, in separate pieces, on the huge need for capital and the dire dearth of it available. GMO's central focus on the direct capital needs of the European banking system in the case of a recovery (but under Basel III) and under stress scenarios. Dismissing the EBA's efforts, and recognizing that the problem is capital/solvency (if there were more, the market would not be worrying about liquidity and deposit flight), their 'neutron bomb' scenario where sovereign debt is recognized as a 'risky asset' (which seems more than plausible to us), the capital needs are almost EUR300bn with Spanish and French banks dominant but Italian and German banks are close behind. As Kyle Bass notes "There is no savior large enough with a magic potion of capital to stave off this unfortunate conclusion to the global debt super cycle.".
GMO asks - What if banks were forced to treat sovereign loans as risky assets, rather than enjoying the current risk weighting of 0%?
If the capital standard is raised to 9%, the needs are unimaginable: 289 billion euros. Spanish banks still have the largest capital demand, 69 billion euros; but French needs exceed those of Italian banks, and German capital demands at 43 billion euros barely lag those of the Italian banks.