EU Talks Yield ‘Limited’ Progress on Banks’ Role in Greek Crisis

By Aaron Kirchfeld and Mark Deen - Oct 23, 2011 1:40 AM GMT+0700

A 10-hour meeting in Brussels failed to yield a blueprint for banks’ role in a revamped Greek rescue as European finance ministers haggled over what they called a “credible firewall” against fallout from deeper writedowns.

The ministers’ meeting broke up at about 7 p.m. after reaching agreement that European banks may need about 100 billion euros ($139 billion) in capital after marking their sovereign-debt holdings to market values, according to a person familiar with the discussions. This amount is needed to reach a core tier 1 capital level of 9 percent based on a European Banking Authority test, said the person, who declined to be identified because discussions are private.

The struggle to get an accord on bank capital was just one piece of solving the two-year-old financial crisis. Governments also are pushing for deeper writedowns on banks’ holdings of Greek debt, a step the investors are resisting.

“Discussions are making progress, albeit limited,” Charles Dallara, managing director of the Institute of International Finance, the umbrella group for 450 of the world’s biggest financial companies, said in a statement late today.

The negotiations were part of a six-day stretch of talks aimed at stopping contagion spreading to Spain and Italy as the turmoil pushes Greece closer to default, roils global markets and dents confidence in the survival of the 17-nation currency. Finance ministers now yield the conference tables after two days of talks to leaders, who meet tomorrow and on Oct. 26.

Pace of Talks

Negotiations among finance ministers from the 27-member European Union, including U.K. Chancellor of the Exchequer George Osborne, were repeatedly extended and the plenary discussion eventually broke off into small groups focused on particular issues after 4 p.m. Brussels time.

“We’ve had a 10-hour meeting, but we have made real progress and we have come to important decisions on strengthening European banks,” Osborne said. “That is just one part of the package and obviously there’s more work to do.”

Vittorio Grilli, the top bureaucrat in Italy’s Finance Ministry, was given the mission by euro-area finance ministers to negotiate deeper writedowns for Greek bondholders, Austria’s Maria Fekter said. She declined to give details of the mandate for Grilli, head of the EU’s Economic and Finance Committee and director general of the Italian Treasury.

Under the terms of a July 21 accord, the banks would take losses of 21 percent on their holdings of the nation’s debt.

Plans now being considered involve an exchange with a 50 percent reduction in net present value, or upfront bond exchanges into either AAA rated bonds from the European Financial Stability Facility or new 30-year Greek government debt, according to people familiar with the matter. Upfront exchanges could involve a 50 percent discount off face value.

“We remain open to explore options on a voluntary approach built on a realistic outlook for the Greek economy and restoration of Greece’s market access,” Dallara said.

To contact the reporters on this story: Mark Deen in Brussels at markdeen@bloomberg.net; Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net