Greece: French banks ready to roll over loans, Sarkozy - TheNewTopical.com - current events, politics, culture, ethics, economics discussion forum

FredFredson · #1 (**permalink**) 27-06-11, 07:15 PM

27 June 2011 Last updated at 07:07 ET

Greece: French banks ready to roll over loans, Sarkozy

BBC News - Greece: French banks ready to roll over loans, Sarkozy
French President Nicolas Sarkozy says his country's banks would help Greece by giving it 30 years to repay.

France's Figaro newspaper said banks are ready to relend - or roll over - 70% of loans they hold.

The plan is being worked out by the French government and bankers.

Greece, which has not yet exhausted all its first 110bn-euro (£98bn, $158bn) bail-out, is already standing by for further rescue loans expected to be up to 120bn euros.
Losses

However, the German government and others have been pressing for banks and other private-sector lenders to Greece to be involved this time round.

German banks are reported to be very interested in the French model being discussed.

A group of international bankers are currently meeting eurozone officials in Rome to discuss the crisis.

The matter is fraught because credit rating agencies, who determine the credit-worthiness of borrowers, have already said they will view any roll-over of loans by banks as a technical default, something that is tantamount to bankruptcy.

The head of the eurozone's rescue fund, Klaus Regling, is talking to the ratings agencies to explore ways to avoid a default rating.

European policymakers - notably the European Central Bank - are also concerned that the move could force Europan banks to recognise billions of euros in losses on Greek debts they currently hold, and could also trigger payouts on credit derivative contracts.
'Restart the system'

Meanwhile, in earlier comments, Axel Weber, the former president of Germany's central bank, said the piecemeal approach to Greece's debt problems would not work.
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There all manner of flaws and uncertainties in the scheme, according to bankers to whom I've spoken ”

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Mr Weber said EU governments should accept that at some point they would need to "restart the system".

The ex-Bundesbank chief said the current options for Greece were either a default with debt writedowns, or for Europe to guarantee all Greece's debts.

He said that repeatedly offering aid would only work for a limited time.

In an interview with the Wall Street Journal, Mr Weber - who was once seen as a likely candidate to run the European Central Bank - said: "There are, unfortunately, only very limited options: Either a default or partial haircuts or a guarantee for the outstanding amount of Greek debt."

He added that "the current piecemeal approach of repeated aid programmes inevitably leads to the latter solution. At some point you've got to cut your losses and restart the system."
Opposition

This week is another crucial one for the indebted country.

The Greek parliament will discuss a new range of austerity measures, which include introducing income tax on earnings of 8,000 euros (£7,142, $11,600).

The ruling party has 155 seats in a 300-seat parliament and polls suggest the proposals are opposed by three quarters of Greece's 11 million population.

On Sunday, Greece's deputy prime minister said some of the key cuts and fundraising measures may not be passed.

They must be agreed before the country can get its hands on the latest slice of the 110bn euro support package.

The country cannot stay financially afloat without that.

Protestors were again out on the streets on Monday and a two-day national strike is planned for Tuesday.

Previous demonstrations have culminated in riots.
Contamination

Meanwhile, two major investors have warned of the gravity of the situation facing Europe.

The joint head of the world's biggest bond fund manager, Pimco, has said Greece's sovereign debt restructuring is inevitable.

And leading investor George Soros, who reportedly made £1bn when the pound crashed out of the euro's forerunner, the ERM, said the world was on the brink of another disaster.

"Let's face it: we are on the verge of an economic collapse which starts, let's say, in Greece but could easily spread," he said.

Mr Soros said it was almost inevitable that one or more eurozone country would exit the single currency.

Britain's "big four" banks - Lloyds , Barclays, Royal Bank of Scotland and HSBC - have a relatively small exposure to Greece.

They have a larger exposure to other struggling eurozone economies, particularly Ireland and Spain.

France's banks hold around 15bn euros in Greek government debt.

FredFredson · #2 (**permalink**) 27-06-11, 07:21 PM

Is France's Greek rescue plan flawed?
Comments (8)

BBC News - Is France's Greek rescue plan flawed?

A protester sits in front of riot police during a peaceful ongoing rally against plans for new austerity measures A two-day national strike is planned for Tuesday in Greece
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The French Treasury believes it has come up with a scheme to persuade creditors of the Greek government to voluntarily re-lend to Greece half of the money that Greece is due to repay over the next couple of years.

If the scheme is taken up by banks, pension funds and other holders of Greek bonds, the effect would be to significantly reduce the amount of emergency loans that eurozone governments would have to provide to Greece.

The aim would be to cut rescue funds provided by the eurozone by €30bn.

The plan is that as existing Greek government bonds reach their repayment dates, the holders of the bonds would pocket 30% of what they're owed, re-lend 50% to Greece for 30 years and invest the remaining 20% in a so-called special purpose vehicle - which in turn would put the banks' money into high quality, AAA rated bonds.

This may sound complicated. But the idea, borrowed from so-called Brady bonds that were used to help Latin American countries cut their massive debt burdens 20 years ago, is that the funds in the special purpose vehicle would act as a form of insurance, to cover the risk that Greece would eventually default on the the new 30-year loans.

Now there all manner of flaws and uncertainties in the scheme, according to bankers to whom I've spoken (and not all those bankers are from perfidious Albion).
'Financial haircut'

First of all, it is not at all clear where the special purpose vehicle will put its money. If, for example, it invests in the only rock-solid AAA rated government bond in the eurozone, German government bonds or bunds, there would not be a high enough yield - even over 30 years - to cover more than a portion of principal and interest that would be lost from a Greek default.

If investors are right that Greece will ultimately have to write off more than half of what it owes, the returns available on German government bonds could not possibly cover that potential cost.
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Which means that any bank participating in the French scheme would surely have to acknowledge that its loans to Greece had been impaired, and it would therefore have to incur a loss - which is precisely the opposite of what the French Treasury is trying to achieve.

The only way for this insurance to be adequate to cover the risk of default would be for eurozone governments to somehow enhance the return available on the SPV's investments.

But that's another way of saying that taxpayers' money would be used to subsidise either the Greek government or the bank creditors' of the Greek government - and that is regarded as politically impossible in Germany.

Second, and this is far more fundamental, some bankers passionately believe that France is traducing the original Brady idea.

The original Brady structure worked, in rebuilding the finances and the economies of excessively indebted countries, such as Mexico, Argentina and Brazil, mainly because those countries were permitted to reduce the total amount they owed their creditors.

To use the jargon, there was a haircut of their sovereign debt. So the insurance part of the scheme was used to protect the value of debt that had already been reduced to more bearable size.
'Great disease'

The original Brady scheme was a genuine path to recovery for countries that had borrowed far more than they could afford to repay.

By contrast, the new French version is aimed at sustaining the claim - which many bankers and investors regard as a dangerous fiction - that Greece can afford to repay all the €340bn it owes.

Broadly the French scheme would do little more than extend the maturity of Greek debt.

But it would do nothing to reduce the crippling burden of all that debt on Greece.

Its aim is to protect both private-sector lenders to Greece, especially the banks, and public-sector lenders to Greece, such as the European central bank and eurozone governments, from taking losses on their Greek loans.

However, most bankers and investors would say that unless and until private or public sector lenders to Greece - or both - are prepared to incur such losses, and reduce what Greece owes them, then neither Greece or the eurozone will be cured of the great financial disease afflicting them both.

FredFredson · #3 (**permalink**) 27-06-11, 07:23 PM

Why another Greek bailout is a stupid idea
Posted by Michael Schuman Tuesday, June 21, 2011 at 7:08 am

Why another Greek bailout is a stupid idea - The Curious Capitalist - TIME.com

The entire financial world was watching Athens today to see whether or not the Greek government would survive a no-confidence vote. Thankfully, it did. More importantly, the government now has to push a new slate of severe austerity measures through parliament next week to try to control its escalating debt. If the package gets rejected, further bailout funds may not flow, and Greece would rapidly spiral towards a default with bond payments coming due next month. That would also probably dash Greek hopes for a second bailout, currently being debated by the leaders of the euro zone. So a lot is riding on next week's vote in Athens – the Greeks economic future, the direction of the European debt crisis, and perhaps even the viability of the monetary union.

But despite all of the potential consequences, I've come to believe that further bailouts for Greece are just plain idiotic, for everyone involved – creditors, the euro zone, or the Greeks. Here's why:

First, the bailouts are not actually making it any more likely that Greece will be able to pay its debts back. Perhaps just the opposite. The bailouts are trying to solve Greece's debt problem with debt. The talk is that a proposed second EU bailout could total as much as 120 billion euros. Taken together with last year's 110 billion-euro rescue, the combined bailouts could add up to a remarkable 100% of GDP. With mandated budget cuts, tax hikes and other austerity measures eating into the country's growth potential, the combination of a stagnant economy and unresolved high debt levels is not going to convince any investor to trust his or her money with the government in Athens.

That's especially because no one can trust Athens to follow through on its reform pledges. Even if the austerity package passes parliament on Tuesday, is it politically possible to implement it? Will politicians eventually cave to anger on the streets? Can the government even survive in the face of such opposition? There is no way investors can be convinced that the government in Athens will hold up its side of the bargain, and thus no way to convince private investors to have faith in further EU bailouts. In fact, continued EU aid may actually be undercutting Greek reform efforts rather than energizing them. In a very interesting analysis of the Greek political situation in The Wall Street Journal, Takis Michas makes the point that those political forces that gain from resisting EU-mandated austerity programs – public sector unions and opposition parties – have no incentive to join in reform since they believe the EU will continue to bail out Greece under any circumstances to protect its creditors. In other words, as long as the Greeks know the gravy train is coming, they have less reason to accept reform.

So this all leads us to another reason a second Greek bailout is idiotic. If creditors will continue to have doubts about Greece's ability to reform and pay them back, then the new bailout scheme simply can't work. At the insistence of the European Central Bank, the new bailout is based on the assumption is that bondholders will “voluntarily” choose to participate in a debt rollover -- to reinvest their money in new, long-term Greek bonds when their original holdings come due. But without confidence in the Greek economy, what sane person would choose to take on long-term Greek debt? Maybe big European commercial banks will “volunteer,” to put off carving a hole in their balance sheets, or due to pressure from political authorities. But everyone else? An insightful story in The Financial Times quoted Gary Jenkins, head of fixed income at Evolution Securities, as saying: “I can't see why anybody would want to roll over a Greek bond if they had a choice. I can't see private investment funds being willing to do this.” So without private sector support, the entire bailout scheme crumbles, and we're looking at a possible default at some point in the future anyway.

Or more bailouts. The EU's solution to Greece's problems is effectively substituting privately held debt for publicly held debt. But is that sustainable? Not really. Greece needs to woo back private investors, but the current bailout system is not making that happen. That means Greece either defaults or becomes a perpetual welfare recipient. But the latter option will not be politically acceptable in Europe. At some point voters and their representatives in countries forced to foot the bill, like Germany and France, are going to say enough is enough and refuse to continue funding Athens.

And then what? However you slice it and dice it, Greece's debt is unsustainable, and the bailout process being employed to fix the problem is equally unsustainable. So let's just stop wasting everybody's time and restructure Greece's existing debt. That would achieve various ends. A debt restructuring will adjust the Greek debt load in a way that gives the government more time to reform, eases the immediate pain to the economy and improves the chances the economy can return to growth. That doesn't mean the Greeks will be let off the hook – painful austerity and public-sector reform are unavoidable under any scenario. But a restructuring would make the reform process more politically palatable in Greece, and thus make it more likely that Greece will be able to pay back its remaining debt. In other words, a debt restructuring will begin the process of restoring confidence in the Greek economy.

What of contagion fears? Well, whether we have an ill-conceived second bailout that no one believes will work or a restructuring/default, we'll be looking at contagion to other weak euro zone economies. At least a restructuring would clear up the uncertainty hanging over European bond markets. And creditors should take their lumps. Anyone silly enough to give the Greeks their money, knowing the state of its feeble finances, deserves to lose out. Perhaps some financial institutions will take a hit, especially Greek banks, which may require a bailout of their own if losses got too big. But a one-off recapitalization of some banks is better than keeping Greece on life support indefinitely. And with private sector creditors finally participating in resolving the euro debt crisis, politicians in Berlin and Paris will have an easier time justifying helping out Greece with more aid if necessary.

And what do we lose with a debt restructuring? Investors would put more pressure on the other bailed-out economies of the euro zone – Portugal and Ireland – as well as on Spain, fearing they could get hit with further losses on those nations' bonds. Perhaps, then, a Greek debt restructuring may make it more likely that other euro zone countries will need further bailouts or worse. But borrowing costs for these countries have been going up anyway due to the uncertainty surrounding Greece, while the reform of these weak economies has to speed along whatever happens in Athens.

So it's time the leaders of Europe bow to the inevitable, restructure Greek debt and deal with the fallout. Is there any other way?

FredFredson · #4 (**permalink**) 27-06-11, 07:28 PM

Forex News and Events:

Forex News - Greek Crisis Still Rolling & Evidence of Contagion Mounting

Events in Greece have once again become the dominate driver for FX. USD remained in demand carrying over from Fridays close, as the weekend news flow suggested continued uncertainty around the austerity vote this week. EU Peripheral sovereign debt yields continued to widen against German bonds (Italy vs. German 10yr govt bond yield spreads widens to a euro lifetime high of 218bp) and S&P continue to come under selling pressure dropping -1.17% on Friday. Asian equity markets were unable to halt the bearish slide with the Nikkei down -1.03%. Greece’s parliament is expected to vote on last week's EU delivery austerity package (expected Wed or Thur). Last week, PM Papandreou’s social party's successful navigation through the “no confidence” vote suggested that the passage of the EU austerity proposal would be difficult but highly possible. However, with a thin winning margin there has always been a fear that the package would be rejected. Over the weekend Greek media are now reporting that 4 Pasok deputies are considering voting against MTFS. But even if it should pass traders are growing uncomfortable with the short term solution. The political tide is shifting and as spending cuts will take their toll on every day Greeks, the likelihood of civil reaction through unrest and political backlash increases. The EU mentioned the concept of flexibility and “reprogramming” the agreement, but perhaps what the Greeks are thinking, might be more along the lines of complete renegotiation as politics change. On the other side are the EU members that seem increasingly dispirited with their roles in the bailout (although rumor that France, Spain and UK have negotiated with banks for debt restructuring is a positive). There is a high probability that either a rogue nation dissents from any bailout and/or Germany's Constitutional court declares last year’s bailout unconstitutional.

So despite EU officials attempt to put a short term patch on it, the EU debt crisis keeps rollin´ on. It's important to note that there has been a noticeable shift in investor’s sentiment as exhaustion sets in. After Bernanke’s call for immediate EU action at Thursday's FOMC press conference and subsequent EU Greek bailout proposal, we are not sure what the next stage will be, should Greek politicians reject the plan. Clearly, the “canary in a coalmine” for Europe is the EURCHF and the pair’s deprecation to new all time lows 1.1806, suggests that traders are concerned. Interestingly, even headlines that China Premier Wen Jiabao pledges further support for Eurozone debt, failed to noticeably shift the EURs bearish tone. The market has become numb to headline grabbing announcements (such as this week’s Papandreou survives no confidence vote & EU offers new bailout) which have too many “if” and merely solve a temporary problem. There is a growing sentiment that Greece is a ticking time bomb.

Should Greece actually pass the austerity program, then for the next five years plus, every quarter, traders will be measuring if Greece will have funding gaps. And with up to 4.00% (estimated) cut from top line GDP growth, for the next 5 years, the probability that the fiscal contraction will actually push Greece into the abyss increases significantly. In addition, weakness in the US and global growth story doesn't bode well for the theory that organic growth will offset EU/IMF mandated cuts. Then you throw in EU contagion and Greece's domestic turmoil and a small bailout doesn't feel so impressive.

As for today, the US data will temporality grab the market’s attention expectation considering last week overly optimistic US economic assessment. With clear indications that QE3 is currently not on the table, but further erosion in data is expected in the near term (then rally in H3), the question is: how weak does the data need to go? Today’s US data such as personal income, personal pending will be interesting indicators to the health and sentiment of the US consumer.

FredFredson · #5 (**permalink**) 28-06-11, 05:47 PM

“Huge Uncertainty” Over Greece: “People Would Be Nuts Not to Have a ‘Plan B,’” Minton Beddoes Says

By Aaron Task | Daily Ticker – 12 minutes ago
?Huge Uncertainty? Over Greece: ?People Would Be Nuts Not to Have a ?Plan B,?? Minton Beddoes Says - Yahoo! Finance

"Police have fired tear gas in running battles with stone-throwing youths in Athens, where a 48-hour general strike is being held against a parliamentary vote on tough austerity measures," the BBC reports.

Meanwhile, a sense of optimism has taken hold in the financial markets, which rallied Tuesday. In recent trading, the Dow was up 0.9%, following similar overnight gains for Europe's major bourses.

The hope is Prime Minister George Papandreou can generate enough support for the Greek Parliament to pass austerity measures, which EU officials say are a prerequisite to additional bailout funds.

"The only way to avoid immediate default is for parliament to endorse the revised economic program [which] must be approved if the next tranche of financial assistance is to be released," EU economic commissioner Ollie Rehn said Tuesday morning. "To those who speculate about other options...there is no Plan B to avoid default."

Like most observers, Zanny Minton Beddoes, economics editor for The Economist, believes the Greek Parliament will pass the austerity package on Wednesday, as well as a subsequent vote on the implementation, slated for Thursday.

"In Greece, nobody really knows. We're looking at a huge amount of uncertainty [but] I suspect when push comes to shove it will squeak through," she says.

However, Minton Beddoes is "somewhat skeptical when Ollie Rehn says 'there is no plan B'. I think these people would be nuts not to have a plan B — to not at least thought about what to do in the contingency that the Greek parliament doesn't pass this."

If the Greek austerity package doesn't pass and the EU doesn't respond with aid, as Rehn suggests, "later this month the Greeks will be forced into a chaotic default," she notes. "That's something everyone is trying to avoid and the Europeans have said for months would be cataclysmic."

One plausible scenario is for a replay of the U.S. Congress vote on TARP in September 2008. After the first vote failed in the House, the Dow plummeted 777 points in a day; less than a week later, a slightly revised version of the bill passed.

"I could imagine something like that happening — the markets go haywire and there's another Greek vote before the default needs to take place," says Minton Beddoes, a former IMF economist. "There's also possibility you have some kind of fudge; the Europeans have extraordinary capacity to fudge things."

In this case, the "fudge" would come in the form of some kind of temporary liquidity facility to assuage debt-holders and promises to the Greeks to allay their concerns about the implications of austerity, she says.

But the biggest fudge of all is the idea that any short-term solution currently on the table can resolve Greece's twin problems of insolvency and the uncompetitive nature of its economy, says Minton Beddoes. "There's no magic bullet solution; there's no easy way out of this mess for Greece," much less the EU as a whole.

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com

roadkill · #6 (**permalink**) 29-06-11, 02:11 PM

Greece is fucked, and everyone is jockeying to avoid being the one to say it.