Banks are pushing back against European leaders on the size of losses they are ready to accept on Greek bonds as officials struggle to rescue the debt-laden country while avoiding a default.
There are limits “to what could be considered as voluntary to the investor base and to broader market participants,” Charles Dallara, managing director of the Institute of International Finance (IIF), an industry group that’s participating in the talks on Greek debt, said in an emailed statement yesterday. “Any approach that is not based on cooperative discussions and involves unilateral actions would be tantamount to default.”
The discussions are an attempt to solve the two-year-old sovereign debt crisis that has pushed Greece toward default and roiled global markets.
European Union leaders, who hold a second summit in four days tomorrow, are seeking an agreement on bolstering the region’s rescue fund, recapitalising banks and providing debt relief to Greece to avoid contagion spreading to Italy and Spain.
Financial companies, represented by the Washington-based IIF, proposed a loss of 40 per cent on Greek debt, said a person briefed on the matter who declined to be identified because the talks are confidential. Luxembourg’s Jean-Claude Juncker, who leads the group of euro area finance ministers, said yesterday that talks on private sector involvement in a second aid package for Greece are focusing on losses of 50 per cent to 60 per cent.
‘DEFENCE STRATEGY’
“The IIF’s strategy is to say the burden is being unevenly shared and there’s a risk of a chain reaction,” said Klaus Fleischer, a professor for banking and finance at the University of Applied Sciences in Munich. “It’s an understandable positioning and defence strategy by the banks.”
Policymakers are seeking a voluntary agreement with Greek bondholders on reducing the country’s debt to avoid the unpredictable consequences of an outright default.
The IIF, whose members include 450 of the world’s biggest financial firms, said a default would risk keeping Greece locked out of international capital markets for years, further damaging the Greek economy, driving up costs for European taxpayers and triggering contagion. The group is in constant contact with the Greek authorities and banks and is working to find “constructive” solutions, Dallara said.
Australian Prime Minister Julia Gillard said on Tuesday that the EU must act swiftly to contain the debt crisis and ensure banks have enough capital to restore investor confidence.
PAINFUL STEPS
“We acknowledge the steps Europe has taken and how painful they have been,” Gillard said at a Commonwealth Business Forum in Perth. “But more needs to be done and needs to be done fast.”
The euro weakened against the dollar and yen in Asian trading on Tuesday. The European currency fell to $1.3903 as of 12.01 pm in Tokyo from $1.3929 in New York yesterday and slipped to 105.79 yen from 106.
EU policymakers are calling for larger writedowns amid a deteriorating Greek economic and financial situation, as highlighted in a draft report last week by the European Commission, the European Central Bank and the International Monetary Fund, collectively known as the troika.
Greek two-year notes currently trade at about 40 per cent of face value. Under the terms of a July 21 accord with the IIF, the banks would take losses of 21 per cent on the net present value of their holdings of the nation’s debt. That plan includes up to ¤35 billion ($49 billion) in high-quality collateral for the investors.
HARD RESTRUCTURING
One option being considered involves a swap with no collateral of any kind in a so-called hard restructuring, people familiar with the matter said on October 21. Other plans involve an exchange with a 50 per cent reduction in net present value, or upfront bond exchanges into either European Financial Stability Facility bonds or new 30-year Greek government debt, the people said. Upfront exchanges could involve a 50 per cent discount off face value.
To help European lenders shoulder sovereign losses, banks may be required to raise about ¤100 billion in capital by mid-2012, according to two people briefed on the matter. The European Banking Authority tested lenders to see how much money they’ll need after writing down bonds from countries such as Greece and marking up stronger debt including that of Germany, they said.
