European banks shirk shouldering rescue for Greece

8th June 2011, Comments 0 comments

Eurozone banks are showing marked reticence towards carrying part of the cost of any second rescue for Greece.

Terms of a new rescue scheme being discussed could draw banks into renewing loans they have made to Greece, in a way likely to mean that the overall return on their loans would be less than agreed initially.

"Participation by private creditors should only take place if all other options have failed," the German federation of private banks said on Tuesday in a statement.

European political leaders, especially in Germany, have insisted however that private banks play a part in any new plans for Greece, which is being crushed by about 350 billion euros ($500 billion) in debt.

Given a lack of acceptable options, "it looks increasingly likely that the (credit) rollover idea is the way forward," ING strategist Padhraic Garvey said.

On Monday, European Central Bank (ECB) president Jean-Claude Trichet told Canadian television CBC that such a solution would be "appropriate" because it would not mean an official restructuring of Greece's debt, which the ECB opposes.

However, expert opinion in financial circles has various views on when a reorganisation of terms applying to government debt bonds amounts to restructuring.

An exchange of old bonds for new ones with an identical face value would mean an "instantaneous" loss for banks because the value of Greek bonds has been marked down on money markets, Garvey noted.

He estimated that 75 percent of European banks would have to agree to the scheme for it to work, and 90 percent "would really be required in order to make a rollover a real success."

European governments, which own stakes in some banks, could be tempted to "influence" them, Berenberg Bank chief economist Holger Schmieding noted.

"If their countries ask them to hold onto Greek bonds, they will," he told a media briefing in Frankfurt.

One way of making the pill easier to swallow could be for the ECB to apply a smaller discount, or reduction, to the value of new bonds when they are used as collateral by banks to obtain short-term refinancing from the ECB compared with the way the ECB prices the older ones, Schmieding said.

But for the plan to work, "it would be important that all banks participate, and there would have to be political coordination among all European countries for that," he added.

Some big banks contacted by AFP did not seem convinced.

"As long as there has been no decision at the political level, there is no reason to take a position," one French banker said.

German banks feel they have already helped Greece by accepting to extend short-term credits to Athens last year.

No specific amount of support was ever published, however.

"That was nice, but ineffective," a German politician commented recently.

French banks made a similar commitment.

At the end of last year, German banks held a total of $22.7 billion in Greek public debt, compared with $15 billion for French banks according to the latest data published by the Bank of International Settlements.

The country has also negotiated a rescue package worth 110 billion euros with the European Union and International Monetary Fund.

A "troika" of experts from the European Commission, IMF and ECB is drawing up a second package to help Greece pay its bills over the next couple of years, with its estimated value somewhere around 60-100 billion euros.

Eurozone finance ministers are to discuss the plan on June 20, followed by heads of state and government three days later.

Approval of a second plan might nonetheless be delayed until later this year owing to resistance within the 17-nation eurozone, a German newspaper said Tuesday, quoting "a "high-ranking European diplomatic source."

© 2011 AFP

0 Comments To This Article