July 2, 2020

Calling Bankers’ Bluff, Merkel Won Europe a Debt Plan

It was approaching 2 a.m. Thursday, not long before the Asian markets would open, and the two leaders were desperately trying to nail down the last component of a complex deal to save the euro: forcing the banks to pay a greater share of Greece’s effective default.

For hours, negotiators had been trying to persuade the banks to accede to a “voluntary” 50 percent loss in the face value of their Greek bond holdings. The banks, which had already agreed to a 21 percent write-down, had dug in their heels.

They knew how badly the European leaders needed a deal, and how much financial experts feared a disorderly, involuntary default. That could set off a “credit event,” throwing world financial markets into turmoil, much as the collapse of Lehman Brothers did in the fall of 2008.

But Mrs. Merkel called the bankers’ bluff, said officials present at the discussions. Accept the 50 percent write-down, she told the bankers, or bear the consequences of default. In effect, she was willing to risk a credit event, and to place the blame for any fallout on them.

The European success sent the markets soaring and laid out the path to a more comprehensive solution to the euro crisis, though the plan faces hurdles.

It includes an order to weak banks to raise more capital to protect against bad loans, and an effort — still very vague — to increase the firepower of the $625 billion bailout fund, the European Financial Stability Facility, to better protect large and vulnerable economies like Spain and Italy.

But the very process of achieving those steps underscored the many problems that lie ahead for the euro zone. While the rescue package has been hailed as an important step, it was achieved only under enormous pressure from the financial markets and with a steely, last-minute stand by Mrs. Merkel.

Foremost among those problems is Italy, which is too big to bail out, owing a total of $2.7 trillion, or 120 percent of its gross domestic product. While Italy runs a relatively small budget deficit, Prime Minister Silvio Berlusconi’s government seems paralyzed, vowing structural changes to produce growth and to further shrink public spending, but it is so far too weak and divided to deliver on most of its promises.

Italian news outlets reported on Thursday that a number of lawmakers from Mr. Berlusconi’s coalition had signed a letter asking him to stand down to allow for the creation of a government that could pass the measures that would tranquilize jittery financial markets.

Market skepticism about Italy has led to high interest rates on its bonds, which if unchecked could rip huge holes into its budget and possibly provoke a full-blown credit crisis. With Mr. Berlusconi hanging on by a thread, and his coalition partner, Umberto Bossi of the Northern League, working to block fundamental change, Italy remains a major vulnerability in restoring market confidence to the euro.

European leaders Thursday welcomed new promises made by Mr. Berlusconi, including a weak pledge to increase the age for pensions to 67 from 65 by the year 2026, but said sternly that carrying them out was the key.

Along with the European Central Bank, they have demanded such changes in return for buying up Italian bonds at cheaper than market rates and helping to create the bailout fund, and now to expand it to about $1.4 trillion, because at $625 billion it is far too small to protect Italy or Spain, and nearly half of that is already committed.

But the leaders were vague about how to enlarge the fund, and reluctant to put up more of their own nations’ capital. They said they hoped to create another special fund open to investment by China, Russia and Japan — which all expressed a willingness to help in principle — as well as by other wealthy nations with surplus cash. But how such a fund would work, and what guarantees it would provide to investors, remain to be determined next month, European officials said. Until the details are clear, there is likely to be little investment.

Also left unclear are the details of how to leverage the existing fund, by guaranteeing a percentage of potential losses by bondholders. While Mr. Sarkozy said the aim was to leverage the fund up to $1.4 trillion, there was no agreement on the specific percentage the fund would guarantee. More should become clear by the time of the Group of 20 summit meeting on Nov. 3 and 4 in Cannes, France.

Even the Greek deal is considered not sufficient. By 2020, Greece, if all goes to plan — which so far it has not — will still have a debt of 120 percent of gross domestic product, the same figure that has everyone so worried about Italy. So Greek pain will continue as it tries to restart growth while balancing its budget and paying even this amount of accumulated debt. Even the write-down in the face value of Greek debt is problematic because it does not cover all of the country’s outstanding public debt, with the rest controlled by institutions that will not take part in the restructuring.

Liz Alderman contributed reporting from Paris, and Elisabetta Povoledo from Rome.

Article source: http://feeds.nytimes.com/click.phdo?i=2e83ff742e7787cf71096e27395848d8

DealBook: Banks in Europe Face Huge Losses From Greece

Yves Herman/ReutersShares of Dexia, the large French-Belgian bank, collapsed in recent days. Banking woes prompted a broad market sell-off in Europe on Tuesday.

Europe’s biggest banks may finally be forced to own up to their losses.

While bank executives and government leaders have been reluctant to acknowledge that the hundreds of billions of euros of Greek debt held by financial institutions is worth far less than its face value, they are slowly accepting the grim reality, as investors, clients and lenders grow increasingly wary.

On Tuesday, Deutsche Bank said it would not meet its profit goals for the year, citing investor uncertainty and losses on Greek bond holdings. Government officials are debating dismantling Dexia, the large French-Belgian bank, and warehousing its troubled assets in a bad bank.

The latest woes prompted a broad market sell-off in Europe, hitting banks in France and Germany particularly hard. Wall Street, dragged down early by the problems on the Continent, lifted at the close, after reports that European financial officials were considering ways to shore up the industry.

As Europe’s debt crisis continues to fester, financial firms exposed to troubled sovereign debt face a brutal fallout.

Weaker banks are moving closer to the embrace of their governments. Shares of Dexia — which held more than 21 billion euros of Greek, Italian, Spanish and Portuguese bonds at the end of last year — collapsed in recent days. The situation led the Belgian and French governments, three years after originally bailing out Dexia, to guarantee the bank’s future financing needs.

For stronger banks like Deutsche Bank, the biggest in Germany, the pressure is building to cut costs and raise capital. On Tuesday, Deutsche said that it could no longer meet its 2011 profit target of 10 billion euros, or $13.3 billion. The bank said it would take a loss of 250 million euros on its Greek debt and cut 500 investment banking jobs, most of them outside Germany.

By the numbers, a write-down on Greek debt should be affordable. Some banks have already marked down their holdings to market prices. But several of the biggest holders, including Dexia, Société Générale, BNP Paribas and two German-owned state banks, have resisted admitting that their Greek bonds are worth, at best, 50 percent of their face value. Dexia has 3.4 billion euros on its books while Deutsche Bank holds 1.1 billion euros.

European policy makers are fearful of pushing Greece into default. Regulators want to wait until they can erect a firewall around Italian and Spanish debt and protect the European banks holding the bonds on their balance sheets at near or face value.

“Once you take a write-down on Greek debt for Dexia, this has systemic implications for the French and German banks,” said Karel Lannoo, the chief executive of the Center for European Policy Studies in Brussels. Dexia may be one of the worst-off banks, he said, but “the issue is the same for all banks — it will be the taxpayer that pays for this.”

European policy makers remain deeply divided on how to deal with the shaky banks.

The French government supports an exchange between Greece and bankers, which was negotiated in July as part of a second bailout for Athens.

But Germany has increasingly pushed for the banks to contribute a larger share of Greece’s growing bailout bill. Officials at the German finance ministry argue that the most efficient way to do this is for banks to take a 50 percent loss on their Greek bonds.

Since the private sector deal was forged in July, the prices of Greek bonds in secondary markets have plunged to about 36 percent of face value, from 75 percent. That has put additional pressure on European policy makers to change the terms of the deal. On Monday, Jean-Claude Juncker, the prime minister of Luxembourg, who leads a permanent working group of euro zone finance ministers, cited the changing market conditions and added that Europe was discussing “technical revisions” to the exchange.

Analysts point out that the cost of this private sector initiative has increased significantly. As originally planned, Greece was supposed to borrow 35 billion euros to buy the AAA bonds needed to back the new securities created for the debt swap.

But the global rally in high-quality debt has made the bonds pricier. People involved in the deal now say that Greece may need to borrow an extra 12 billion euros.

While the question remains whether taxpayers or financial firms will make up the difference, European authorities may be moving closer to a coordinated effort on the banks.

Olli Rehn, the European commissioner for economic affairs, told The Financial Times on Tuesday that banks’ capital positions “must be reinforced to provide additional safety margins and thus reduce uncertainty.” He said there was “a sense of urgency,” acknowledging that officials were discussing measures to bolster the banks.

Mr. Rehn’s reported comments appear to be at odds with those of his colleague, Michel Barnier, the European commissioner responsible for financial services. On Tuesday, after a meeting of European Union finance ministers in Luxembourg, Mr. Barnier said that although bank recapitalization was proceeding, there was no need for new measures.

A growing number of economists, and some voices within the International Monetary Fund, argue that banks need to formally acknowledge their losses to restore their credibility.

“It is difficult to see how Greece gets out of this without a write-down of its debt,” said a senior I.M.F. official who refused to be identified because he was not authorized to speak publicly on the sensitive issue.

Stephen Castle contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=e071b29ed9abfd7aa34c3f607f722fe9

News Analysis: E.C.B. Could Survive a Greek Default, but What About the Banks?

FRANKFURT — The European Central Bank’s holdings of Greek government bonds are small enough for it to be able to survive even a large haircut if the country defaults, and its main concerns lie with the impact on the banking sector.

The E.C.B. has spent more than €150 billion, or $200 billion, on peripheral government bonds through its Securities Markets Program, which started in May 2010, first buying Greek, Irish and Portuguese bonds and more recently Italian and Spanish.

Analysts estimate the E.C.B. holds about €45 billion to €50 billion of Greek government bonds it has bought in the secondary market at well below face value, weakening the hit the central bank would have to take in a debt restructuring.

“The E.C.B. by definition has been buying in times of stress, so a rough calculation shows, if they’ve been buying at 70-75 percent (of face value), they would effectively take only a 25 percent haircut,” a Nomura economist, Laurent Bilke, said.

This would mean the E.C.B. would have to accept a loss of around €15 billion to €20 billion from a 50 percent haircut to the face value of the bonds.

“It’s a large amount, but it’s not going to bring the E.C.B. under, it’s not going to go bankrupt,” Mr. Bilke said.

Capital and reserves of the E.C.B. and national euro zone central banks amount to more than €81 billion, the central bank’s balance sheet showed.

The Greek media reported a week ago that Finance Minister Evangelos Venizelos had discussed plans for an orderly default with the International Monetary Fund chief Christine Lagarde and the president of the European Central Bank, Jean-Claude Trichet, as one of three possible scenarios for resolving the country’s fiscal woes.

Officials played down the reports and Mr. Venizelos described them in a statement as an unhelpful distraction from the central task of sticking to Greece’s E.U.-I.M.F. bailout program.

Until recently, European leaders have rejected any chance of Greece defaulting, but are moving to allow for the possibility of this happening.

Klaas Knot, a member of the European Central Bank’s governing council from the Netherlands, on Sept. 23 became the first euro-zone central banker to warn outright of the possibility of a Greek default.

If it comes to a default of Greece — orderly or disorderly — the bigger problem for the E.C.B. would be the systemic risks stemming from such a step.

“It will be very difficult for Portugal and Ireland not to suffer a loss of confidence then,” said Silvio Peruzzo, a Royal Bank of Scotland economist, also pointing to Italy and Spain.

Talk that Europe needs to shore up its banks — if necessary with capital from taxpayers — is gathering strength. The past recession, losses on sovereign debt and higher funding costs are weighing heavily on banks’ balance sheets, and some suggest there should be forced recapitalization by governments if it does not happen otherwise.

The International Monetary Fund reckons Europe’s banks could need to recapitalize to the tune of €200 billion and many bank analysts are far gloomier than the Fund.

To ease stress on banks, the E.C.B. already reintroduced its longer-term, six-month refinancing operation in August and last week joined other major central banks in offering three-month U.S. dollar loans to commercial banks to prevent money markets from freezing up again.

There is now talk of offering longer, one-year liquidity to banks.

Stress in the interbank lending market is already an “indication that the crisis has moved into systemic mode,” Mr. Peruzzo said.

Crippled banks are also likely to leave the E.C.B. holding collateral with little value, but since it accepts all collateral at market value minus a haircut, its losses from this would be manageable — especially since governments would be loathe to let banks collapse as they fear contagion.

Major European banks would probably be able to take such a hit but for Greek banks it could be the last straw.

“Collateral becomes a problem only if Greek banks go under,” Mr. Bilke at Nomura said. “There would be a general issue with Greek banks, they would have to take a big loss and probably some of them would not be able to go through if there’s a big haircut.”

To prevent a Greek default from infecting the whole banking sector, authorities would have to come up with a program to keep banks afloat — and this would have to come mainly from governments, keeping E.C.B. exposure manageable.

So, while the E.C.B. could take the direct losses in its stride, the fear of instability and economic collapse keep it opposing Greek default.

Article source: http://www.nytimes.com/2011/10/01/business/global/ecb-could-survive-a-greek-default-but-what-about-the-banks.html?partner=rss&emc=rss

Off the Charts: For Banks, Unfortunate Echoes of 2008

Then Lehman Brothers failed, and prices fell much more.

As the anniversary of that date approached, investors seemed to fear it might all happen again. By the end of this week, those same indexes were down about as much this year as they were at this point in 2008, and many bank stocks did even worse than they did in early 2008.

There is a circular logic to this year’s decline. In 2008, banks in many countries were rescued by governments. Now it is feared that banks may be in danger because some of the same governments may not be able to meet their obligations. That is particularly true in Europe, where bonds from several countries trade well below face value.

On Friday, Greece’s finance minister, Evangelos Venizelos, blamed “organized rumors” for renewed speculation that Greece would default, and said the country intended to comply with all terms needed for the bailout that European countries agreed to in July. But the fact that the details of the deal have yet to be locked down has unnerved some investors.

In a speech this week, Josef Ackermann, the chief executive of Deutsche Bank, said it was not justifiable for politicians to demand that European banks raise more capital, as Christine Lagarde, the head of the International Monetary Fund, had done. “It’s obvious,” he said, “that many European banks would not be able to handle writing down the sovereign bonds they hold on their banking books to market levels.”

But, he said, it would “risk undermining the credibility” of European bailout packages “if politicians were to now send out the signal that they do not believe in the success of those measures.” And, he argued, forcing banks to raise capital now would anger investors by forcing the dilution of current shareholders.

As can be seen in the accompanying charts, Deutsche Bank has lost more than two-fifths of its value this year, a performance that is better than that of some banks. Its shares are trading for about what they cost at the end of 2008, but they are less than half what they were worth just before the Lehman failure.

Of the 30 banks shown, only one — Standard Chartered of Britain — has a share price higher than it had on the eve of the Lehman collapse. Even so, its shares have lost nearly a quarter of their value this year.

Shares in Intesa Sanpaulo, an Italian bank, have lost half their value this year, and are trading for about one-quarter less than they did on March 9, 2009, when most financial stocks hit their credit crisis lows. UniCredit in Italy, Société Générale in France and Lloyds in Britain have also suffered badly this year, losing half or more of their value. Credit Suisse, in Switzerland, and Barclays, in Britain, have fallen almost as much.

Among the largest American banks, some of the worst performers have been those that were widely deemed to be too big to fail. Bank of America, troubled by its ill-fated acquisition of Countrywide Financial, is the worst performer so far in 2011, but Citigroup, Goldman Sachs and Morgan Stanley have done almost as poorly. Morgan Stanley’s share price is also a little below its March 9, 2009, level.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

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