Under accounting rules, banks have to adjust the value of sovereign bonds held in the trading book according to changes in market prices, said Konrad Becker, a financial analyst at Merck Finck & Co. in Munich. For government debt held in the banking book, lenders must write down their value only if there is serious doubt about a state’s ability to repay its debt in full or make interest payments, he said.No problem here for the major European banks--just transfer all of your sovereign debt into your banking book and repeat the EU's proclamation that no European country will ever default. So in the case of Greece you simply take a 1-2% haircut even though those 4% 10 year bonds you bought in 2008 are now yielding 10%. Under the EU's worst case sovereign shock scenario banks would have to:
assume that rising government-bond yields will push up borrowing costs, spurring defaults in the private sector that would lead to losses in lenders’ banking books, said the person.The real question is whether this charade will be enough to fool the market as it did in the US. Remember how American banks magically went from bankrupt institutions (in Fed-March 2009) to superior companies which were able to raise 100's of billions in new capital (by June-July 2009). We shall see.
Black Swan Insights