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Eurozone rescue plan to lean on banks

The Local · 24 Oct 2011, 11:33

Published: 24 Oct 2011 11:33 GMT+02:00

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It seems increasingly certain that banks will have to accept a loss on Greek debts of up to 60 percent in return for at least €100 billion in recapitalisation, with a strengthening of the euro rescue fund via leveraging, while shielding the European Central Bank (ECB) from more direct participation.

Yet despite the busy weekend, a long row of meetings is scheduled for the coming few days, with the plan being to have a package of measures tied up by the end of Wednesday.

Banks have reportedly already agreed to increase the loss they will accept on Greek debts from 21 percent to 40 percent, although this is still some way from the 60 percent considered to be necessary.

The level of Greek debt is now expected to reach €252 billion by 2020, according to a report from the European Union’s troika – such a sum would require the 60 percent debt reduction by the banks in order to bring the national debt to 110 percent of gross domestic product in 2020.

Governmental representatives and international banks are “not even close to an agreement,” said Charles Dallara, manager of the Institute of International Finance, although German banks seemed to be more flexible, with Michael Kemmer, manager of the German Banking Association saying, “The German banks are well capitalised. A reasonable write-down would be bearable.”

Merkel left open the question of whether they might be forced to accept such losses, according to the Frankfurter Allgemeine Zeitung, which also reported that Jean-Claude Juncker, head of the eurozone group and Luxembourg’s prime minister said that an ‘obligatory solution’ could be imposed on the banks. French President Nicolas Sarkozy on the other hand, has said acceptance of such losses would have to be voluntary.

Banks experiencing difficulties as a result of the losses would be boosted with a recapitalisation of up to €110 billion, should private sources dry up. But to the dismay of some countries, national governments would have to first offer aid to the banks, and the European Financial Stability Facility (EFSF) would only be tapped as a last resort.

The EFSF would in turn be boosted by leverage, enabling it to cover far greater sums than its own capital resources of €440 billion. The French suggestion of doing this by leaning on the ECB has been rejected, with two other options remaining on the table for discussion.

The first would enable the fund to insure investors against potential losses on their bond holdings in order to tempt them back into the bond markets of shaky economies.

The second option would create a second fund for other state funds from countries such as China, Singapore, Norway or Qatar and the International Monetary Fund to pay into, creating a firewall for countries such as Italy and Spain for their losses to Greek debt write-down.

Disagreement between Merkel and Sarkozy was set aside for at least long enough for the two leaders to berate Italian Prime Minister Silvio Berlusconi that he must also do his economic homework to help stem the debt crisis.

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“Italy has a high total debt situation and that must be reduced; that is the expectation,” said Merkel, while Sarkozy said that Spain, until now the main concern after Greece, was no longer the first in line for attention.

European Union council President Herman van Rompuy also added his weight to pressure on Berlusconi, saying he really had to implement the promises he had made to reduce his country’s €1.9 trillion debt. Berlusconi finally said he would hold an emergency cabinet meeting on Monday to push through reforms.

Merkel was due back in Berlin on Monday, to oversee the passage of the EFSF options through the German parliament – she needs parliamentary assent for either version before returning to Brussels to decide with other leaders on what to do. She was set to address the heads of all German political parties on Monday lunchtime to tell them about the Brussels talks.

The Local/DAPD/hc

The Local (news@thelocal.de)

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Your comments about this article

14:37 October 24, 2011 by jg.
So - a group of countries, who are all in debt to a load of banks, are leaning on those same banks to forget some of the debt. Because the banks themselves are also in debt, the same countries will put some of their money into the banks. As we already know those countries haven't got any money to give to the banks, I guess they plan to borrow that money from the same banks....and so the downward spiral continues. The likely losses on sovereign debt will only lead to ever lower credit ratings and higher interest rates from the markets.
20:31 October 24, 2011 by Jack Kerouac
Why is it always Germany's and France's responsibility to bail out other EU countries? I know that they desperately want the EU idea to work, but at what cost? I would feel used if I were Germany right now. These irresponsible countries are using the more responsible ones for bailouts - and once you give once, you can never withhold again. There will just continue to be more and more bailouts. We need a stronger resolution to this than borrowing from the private sector and leaning on the same banks that we owe substatial debt.
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