Banks nowhere near deal on Greece

Greek Finance Minister Evangelos Venizelos, left, speaks with ECB President Jean-Claude Trichet

Πηγή: AP
By GABRIELE STEINHAUSER

Oct 22 2011

BRUSSELS (AP) -- The head of an international banking lobby that has been leading negotiations on giving Greece easier terms on its debt says the private sector and the eurozone are far from reaching a deal to cut Greece's debt load.

Charles Dallara, the head of the Institute of International Finance, says Saturday "we're nowhere near a deal."

Banks in July agreed to accept 21 percent losses on their Greek bonds. But a report Friday by Greece's international debt inspectors said its debt might have to be cut up to 60 percent for the country to recover.

Dallara told The Associated Press plans to slash Greece debt would still leave it as "a ward of Europe" for years.

He says "we would be open to an approach that involves additional efforts from everyone."

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

BRUSSELS (AP) - EU finance ministers neared agreement Saturday on forcing banks to raise just over euro100 billion ($140 billion) to ensure they have enough cushion to weather further losses on their Greek bonds as well as market turmoil, a European official said.

In order to help Athens dig out of its debts - and hopefully keep a cap on the amount of money they have to loan Greece - the 17 countries that use the euro agreed Friday to ask banks to take bigger writedowns on Greek bonds. A new report suggests the value of Greek bonds might need to be slashed as much as 60 percent.

Taming Greece's debts is an important part of the euro debt crisis puzzle, but it could make banks across the continent - not just in the eurozone - more vulnerable at a time when they're already facing declining stock prices and finding it difficult to get regular loans for their day-to-day operations.

So when the eurozone finance ministers decided to reopen negotiations on Greek debt with the banks, the EU had to force its banks to reinforce their rainy-day funds.

Strengthening banks and slashing Greece's debts are critical to solving Europe's crisis, which is now threatening to engulf larger economies like Italy and Spain and is blamed for dampening growth across Europe and even the world.

"The crisis in the eurozone is doing real damage to many of the European economies, including Britain," George Osborne, Britain's chancellor of the exchequer, said as he headed into Saturday's meeting. "We have had enough of short-term measures, sticking plasters that get us through the next few weeks."

The European official said EU leaders meeting Sunday should sign off on forcing the continent's biggest banks to raise just over euro100 billion in capital. The official spoke on condition of anonymity because the discussions between ministers were still ongoing.

The figure is likely to disappoint some analysts. A report by the International Monetary Fund has called for up to euro200 billion ($280 billion) to be poured into banks.

The new rules would force systemically important banks to raise their core capital ratios to 9 percent, compared with just 5 percent to 6 percent they needed to pass EU stress tests this summer. The ratio measures the amount of capital banks hold compared to their risky assets.

Greece, of course, has it far worse: The country is struggling through a third year of recession and record unemployment, which reached 16.5 percent in July. Deep anger is building against the Socialist government's repeated rounds of new austerity measures. A two-day general strike against the new cuts and taxes shut down much of the country this week and led to violent protests on the streets of Athens.

Pressure to contain the Greek crisis ramped up Friday after a new report from the country's debt inspectors - the European Commission, the European Central Bank and the IMF - showed that its economic situation had deteriorated dramatically even since the summer.

If banks don't take bigger losses, the report said, Greece's debt would peak at a massive 186 percent of economic output in 2013 and only decline to 152 percent by the end of 2020.

That would prevent Greece from raising money on the markets until 2021 and require the eurozone and the IMF to fund an extra euro252 billion ($350 billion) in new loans to Greece through 2020, according to the report, which was marked confidential but was seen by The Associated Press.

Those funds would be in addition to Greece's first bailout of euro110 billion ($152 billion), which has been keeping the country afloat since May of last year, and another euro109 billion ($150 billion) rescue agreed to in July.

The report said that Greece's debts would have to be cut by 60 percent if the eurozone wants to avoid lending it more money. It did not make policy recommendations, and the European Central Bank opposes cutting Greece's debts further.

But finance ministers are clearly paying close attention to the experts' document. Austrian Finance Minister Maria Fekter told journalists Saturday that the eurozone's chief negotiator, Vittorio Grilli, had been asked to restart negotiations with banks.

That means the July deal, under which banks would have taken writedowns on their Greek bond holdings of about 21 percent, is definitively off the table.

Despite that significant progress, agreement on arguably the most important measure has remained elusive to eurozone leaders: boosting the firepower of the currency union's euro440 billion ($600 billion) bailout fund to keep the crisis from spreading.

Increasing the effectiveness of the fund - called the European Financial Stability Facility - is meant to help prevent larger economies like Italy and Spain from being unable to afford to borrow money from markets. That's exactly what happened to Greece, Portugal and Ireland and why those three EU countries needed bailouts.

Germany and France still disagree over how to do that and failed to make much progress on that front Friday night. German Chancellor Angela Merkel and French President Nicolas Sarkozy are meeting Saturday evening in the hopes of moving toward a deal.

The Greek crisis and its threat of contagion have led to calls for more robust intervention when it becomes clear that an EU country is in financial trouble.

German Foreign Minister Guido Westerwelle said Saturday that the EU along with the IMF should be able to directly intervene in the budgets of member states if they are receiving financial aid but failing to meet fiscal targets.

But not all EU nations share his view. The foreign ministers of Luxembourg and Finland cautioned that changing the EU treaty is too big a task to tackle now and the bloc should try instead to strengthen budget rules through existing channels.

Significant changes to the EU treaty would require national referendums in some countries, and winning approval for the current treaty from 27 nations took 10 years.

Bondholders demand Greek growth plan

Πηγή: FT
By Peter Spiegel, Quentin Peel and Alex Barker
Oct 22 2011

Charles Dallara, chief negotiator for the largest holders of Greek debt, said Saturday that while

Bondholders are prepared to take higher losses on their Greek debt, but they are far from a deal with European governments.

“Talks over Greek debt are continuing, but we are nowhere near an agreement,” Charles Dallara, chief negotiator for the Institute of International Finance, the largest holders of Greek debt, said on Saturday.

The Institute of International Finance, is only prepared to strike a deal only if it is accompanied by a credible plan to return the economy to growth “in order to reduce Greek dependence on European taxpayers and on private sector [losses].”

Mr Dallara’s hardline stance comes a day after government lenders said Greece’s economy had deteriorated so severely that bondholders must accept a 60 per cent cut in the value of their holdings in order to bring the second Greek bail-out back to the €109bn agreed in July. The report made clear European leaders would push Mr Dallara to accept losses far beyond the 21 per cent “haircut” agreed in July.

“It has got to increase massively,” Jean-Claude Juncker, the Luxembourg prime minister who chairs the group of eurozone finance ministers, told the FT.

Eurozone finance ministers met in Brussels on Saturday to give their lead negotiator, Italian treasury chief Vittorio Grilli, a mandate on Greek bonds to take to Mr Dallara, but the IIF’s resistance threatens to derail hopes of a reaching agreement on a second bail-out by Wednesday.

The possibility of stalemate came as European leaders struggled to agree on a range of issues aimed at solving the debt crisis.

There were signs of stalemate on tough new thresholds for European bank capital and a new, competing plan to increase the firepower of the eurozone’s €440bn rescue fund was thrown into the deliberations.

According to European officials, the new plan to enhance the European financial stability facility would include creating a special fund to attract private investors, that could be used to purchase Italian and Spanish bonds.

The new fund, which would be set up as a special-purpose vehicle, would use seed money from the EFSF and give private investors incentives to add cash by insuring them against losses. By adding private money, the EFSF would be able to leverage its assets to purchase more bonds than if it were to buy them directly.

“The principle that we leverage the EFSF with private money is being subscribed by everyone but the level of success is uncertain,” said Jan Kees de Jager, the Dutch finance minister. “How much can we raise, that is being looked at.”

The SPV option is being considered alongside a scheme that has long been viewed as the frontrunner, using the EFSF to guarantee bondholders against 20 per cent of their losses. One person familiar with the talks said the two options were not mutually exclusive and could be used in parallel.

Finance ministers from all 27 European Union countries met in between sessions of their eurozone counterparts on plans to recapitalise Europe’s banks. A deal was expected to be wrapped up on Saturday, but there were increasing signs of difficulties as negotiations stretched into the evening. George Osborne, UK chancellor, cancelled his afternoon flight home to stay for the talks.

According to European officials, several struggling countries – including Spain, Italy and Portugal – were resisting stringent new capital thresholds proposed by the European Banking Authority, the EU’s bank regulator.

The EBA proposal would require banks to temporarily raise their core tier one capital levels – the key measure of financial strength – to 9 per cent and mark down their holdings in sovereign debt to current market levels.

Because Spanish and Italian sovereign bonds have been under attack since August, and are mostly held by Spanish and Italian banks, Madrid and Rome have resisted since their banks would be required to raise the most capital.

Several European officials said the 27 finance ministers may be called back into session early next week to resolve the standoff.

Deliberations over all eurozone issues were expected to move to heads of government by Saturday night, when presidents and prime ministers from across the EU begin arriving ahead of a much-anticipated summit on Sunday.

George Papandreou, the Greek prime minister, was scheduled to meet José Manuel Barroso, European Commission president, on Saturday evening before Mr Barroso headed to a pre-summit gathering of centre-right leaders, including France’s Nicolas Sarkozy and Germany’s Angela Merkel.

Mr Barroso, Mr Sarkozy and Ms Merkel were then planning a pre-summit crisis meeting over dinner later in the evening with IMF chief Christine Lagarde, ECB president Jean-Claude Trichet, and European Council president Herman Van Rompuy.