Bank Losses from Cut on Greek Debt Holdings

On the surface, banks are taking huge losses from the 50-percent hair cut on their Greek debt holdings. But underneath, the losses may only result in reduced interest earnings if the amount of prior interest payments, which are based on rather high interest rates, is enough to cover the principal losses. Going forward, interest earned on the now reduced principal represents lowered interest revenue when basing the return on the original principal. Note that the debt deal doesn't include any cut on interest rates.


As a result, banks may come out just ok, but not earning as much as initially anticipated. Media reports focus on only banks' nominal principal losses. The analysis here intends to uncover the hidden story. Understanding the inner working of banks' sovereign debt holdings, investors can correctly assess their bank stocks. In fact, shares of many banks that have exposures to the Euro debt crisis have been trading higher, rather than lower on supposed losses, after the latest debt agreement.