Banks Clash With Lawmakers on Greek Rescue

By Nicholas Comfort and Aaron Kirchfeld - Oct 25, 2011 5:01 AM GMT+0700

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Oct. 25 (Bloomberg) -- Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School in Philadelphia, talks about Europe's sovereign debt crisis. Siegel speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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, an industry group that’s participating in the talks on Greek debt, said in an e-mailed statement yesterday. “Any approach that is not based on cooperative discussions and involves unilateral actions would be tantamount to default.”

The discussions are part of 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, recapitalizing 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 percent 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 percent to 60 percent.

‘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.”

Policy makers 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.

Larger Writedowns

EU policy makers 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 percent of face value. Under the terms of a July 21 accord with the IIF, the banks would take losses of 21 percent on the net present value of their holdings of the nation’s debt. That plan includes up to 35 billion euros ($49 billion) in high-quality collateral for the investors.

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 Oct. 21. Other plans involve an exchange with a 50 percent 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 percent discount off face value.

To help European lenders shoulder sovereign losses, banks may be required to raise about 100 billion euros 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.

To contact the reporter on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net