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Greek politics has thrown the rescue of Europe's banks into disarray.

Last week, major European banks knew roughly how much new capital they would need to raise by next summer to repair their balance sheets from losses on government bonds in hard-hit euro zone countries. Under the stabilization plan agreed upon by European Union leaders, the banks would have to find about €106-billion ($148-billion) in total – less than many observers had feared.

But that was predicated on taking 50-per-cent writedown on all Greek debt they hold. If the bailout plan for Greece, which also calls for sweeping austerity measures, is killed by its citizens in a referendum announced late Monday, those calculations would go out the window. And new analyst estimates suggest the cost of recapitalizing would shoot up, and possibly double, if Greece were to have a disorderly default on its debt.

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That uncertainty now weighs heavily upon the entire European financial system and roiled bank stocks around the world. In France, shares of Société Générale SA fell 16 per cent Tuesday. Intesa Sanpaolo SpA of Italy dropped 16 per cent as well. Deutsche Bank AG and Commerzbank AG, two of Germany's biggest lenders, fell 8 and 9 per cent, respectively. Almost every major European bank was down sharply. Canadian banks fell nearly 3 per cent.

"Before you can plug a hole, you need to know how big the hole is," analyst Rob Sedran at CIBC World Markets said. "When the Greece situation gets thrown into disarray, which is what has happened, you just don't know how much money you need, so it just stalls everything."

The decline in their share prices makes a difficult situation worse for Europe's banks, since there were already questions about where the banks would find the €106-billion of new capital they need in the existing stabilization plan.

Typical methods for raising capital, such as selling shares or divesting assets, are tough to execute in a market that is retrenching. Bank executives are concerned about selling off attractive assets too cheaply or diluting their stock too much in order to recapitalize.

Greece's decision to seek a vote will affect other countries directly. Already, investors are flocking to German bonds amid the uncertainty, which has pushed up borrowing costs for countries such as Italy. The concerns are particularly high for the French banks, which are considered the most exposed to Greece's debt situation, along with banks in Italy, which is in precarious financial shape.

Under the bailout plan for Greece, private lenders holding the country's sovereign debt would write off half of their Greek debt, while the government would respond with tougher measures to shore up its finances. To do so, the government would have to make further cuts to public spending and raise taxes, two scenarios that have the country's Prime Minister, George Papandreou, facing opposition on all sides.

By pushing the matter to a referendum, analysts believe the chances are increasing that Greece might end up defaulting. Fitch Ratings, a bond rating agency, said the likelihood is also greater of a "disorderly default" in Greece, which would make it difficult for other countries to contain the fallout, and to prevent contagion from spreading beyond its borders.

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Following a short market rally after the Greek deal was announced last week, investors quickly began pricing back in some of the risk that had evaporated from European bank stocks. A report by Goldman Sachs on the European banking sector predicted more asset sales and a slashing of dividend payouts at French banks in the coming year as financial institutions scramble to build up capital.

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Senior Writer

Grant Robertson is an award-winning journalist who has been recognized for investigative journalism, sports writing and business reporting. More

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