Why a borrower bailout is not likely

The EBS is on the block and there have been countless headlines regarding the idea that debts might get written down by Wilbur Ross if the Cardinal Capital group (who he is backing) are the successful bidder. I have said that I doubt this will happen and will set out why in this post.

EBS carried out a PCAR (prudential capital assessment requirement) test in March 2010, it showed that they required €875 million in funding to come up to scratch. Thus far they received €100m in cash from the state and a further €250m in a promissory note leaving a gap of €525m to fill. The bids being touted are in the region of €550m meaning that whoever buys in is effectively bridging the gap and paying a small premium as well.

Take a look at a balance sheet and you’ll see that no matter what happens, that in the end assets=liabilities. That is an accounting identity, in our example we have a hypothetical bank which has assets and liabilities worth (for example sake) €100 million Euro.

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