August 16, 2022

Rescue Measures for Greece Advance as French Offer to Ease Debt

With investor pressure mounting ahead of the vote by the Greek Parliament this week, President Nicolas Sarkozy outlined a proposal under which French banks would give Athens more time to pay back loans as they come due over the next three years.

The banks would share part of the cost of the bailout by extending new loans to Athens as old loans mature, but the banks would not have to forgive the debt itself, a concern of many investors.

“We’ve been working on this with the banks and insurance companies,” Mr. Sarkozy said at a news conference in Paris. “We’re committed to going from a principle — the voluntary participation of the private sector — to concrete reality.” Mr. Sarkozy said he hoped that other European countries would adopt a similar plan.

It comes at a critical moment in the long-running drama over how to prevent a default on Greece’s $467 billion debt.

A vote on Greece’s latest $40 billion austerity package is scheduled for Wednesday, with another vote scheduled for Thursday on separate legislation to carry out the reforms. If the measures pass, the European Union is expected to announce the size and details of a new, second bailout package at a meeting of ministers on Sunday.

If the Greek Parliament were to vote the package down, a chain reaction could engulf global financial institutions.

Investor confidence in the debt of countries on the periphery of Europe like Greece, as well as Portugal and Ireland, has been rapidly eroding. European financial institutions hold more than half a trillion dollars worth of their sovereign debt. Private borrowers in these countries, who would also be hammered by a public default, owe Europe’s banks another trillion, according to the Bank for International Settlements.

The French banks’ willingness to chip in underscores just how vulnerable giants like Société Générale and BNP Paribas would be in a full-scale default, a danger also confronting large institutions in Germany, Belgium and elsewhere. It is also why European leaders have the leverage to extract concessions from banks as part of a broader rescue package for Greece.

With European leaders unable to come up with a concrete plan until now and Greek politicians balking at calls for austerity, the picture for Europe’s banks has been growing dimmer by the week. “Investors think policy makers are kicking the can down the road,” said Philip Finch, a bank analyst with UBS in London.

As a result European bank shares have fallen nearly 25 percent over the last four months, helping bring down the shares of their counterparts in the United States, which have lost 13 percent over the same period.

But unlike American banks, which raised capital and wrote off tens of billions of dollars in bad loans after the financial crisis, European institutions have been much slower to acknowledge the problems they face, analysts and investors said. Even without a sovereign debt default, Mr. Finch said, European banks need to raise $150 billion in capital to bolster balance sheets.

French officials said the proposal announced Monday was the fruit of recent meetings between the Élysée Palace, the French Treasury, the Bank of France and the French banking federation.

The initiative is likely to be supported by Jean-Claude Trichet, the departing president of the European Central Bank, who had stood against plans to automatically impose losses on the face value of Greek debt.

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