Banks Squabble With EU Over Greek Debt Losses

By Aaron Kirchfeld - Oct 24, 2011

The world’s biggest banks are squabbling with European leaders over the size of losses on their Greek bonds as they seek a deal to cut the country’s debt load, two people with knowledge of the discussions said.

The financial companies, represented by the Institute of International Finance, proposed a loss of 40 percent on Greek debt, said one of the people, who declined to be identified because talks are confidential. The European Union is calling on investors to forfeit as much as 60 percent, making a compromise at 50 percent possible, the person said.

The talks are part of an attempt to solve the two-year-old sovereign-debt crisis that has pushed Greece closer to default, roiled global markets and dented confidence in the survival of the 17-nation currency. EU leaders are scrambling to reach an agreement on bolstering the region’s rescue fund, recapitalizing banks and relieving Greece to avoid contagion spreading to Italy and Spain before another summit in two days.

Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said talks on private-sector involvement in a second aid package for Greece are focusing on losses of “about 50 percent, 60 percent.”

Charles Dallara, managing director of the IIF, the lobby group for 450 of the world’s biggest financial companies, said on Oct. 22 that “discussions are making progress, albeit limited.” The group remains “open to explore options on a voluntary approach built on a realistic outlook for the Greek economy and restoration of Greece’s market access,” he said.

Larger Writedowns

EU policy makers have been calling for larger writedowns amid a deteriorating Greek economic and financial situation, as highlighted in a draft report last week by the European Commission, the European Central Bank and the International Monetary Fund, collectively known as the troika.

Greek two-year notes currently trade at about 40 percent of face value. Under the terms of a July 21 accord with the IIF, the banks would take losses of 21 percent on the net present value of their holdings of the nation’s debt. That plan includes up to 35 billion euros ($49 billion) in high-quality collateral for the investors.

One option being considered involves a swap with no collateral of any kind in a so-called hard restructuring, people familiar with the matter said on Oct. 21. Other plans involve an exchange with a 50 percent reduction in net present value, or upfront bond exchanges into either European Financial Stability Facility bonds or new 30-year Greek government debt, the people said. Upfront exchanges could involve a 50 percent discount off face value.

To help European lenders shoulder sovereign losses, lenders may be required to raise about 100 billion euros in capital by mid-2012, according to two people briefed on the matter. The European Banking Authority tested lenders to see how much money they’ll need after writing down bonds from countries such as Greece and marking up stronger debt including that of Germany, they said.

Reuters reported the 40 percent proposal by banks late yesterday.


Still waiting for a European solution

The BNN Chase by Marty Cej:

European leaders have adjourned to Wednesday, taking fresh proposals from the weekend’s summit back to their respective parliaments where dismay and disappointment will be expressed in a multitude of languages. Formal plans should be drawn up by Tuesday and announced at the completion of another summit Wednesday.

There will be three main pillars to the plan: A haircut for holders of Greek debt that is likely to become more of a buzz cut; larger European bank recapitalizations, and some kind of external support for the EFSF bailout mechanism that assures markets that those in greatest need of bailouts or backstops – Greece now, Italy soon – will get what they need when they need it. The next three days ought to see plenty of leaks to the media as governments try to lessen the shock to markets and voters of coming to an actual decision.

The solution will be televised.
In the meantime, central bankers elsewhere continue to wrestle with the impact of the European debt crisis on their own economies. Federal Reserve Bank of Dallas President Richard Fisher was one of three Fed members to dissent from Open Market Committee decisions in August and September to lower borrowing costs and stimulate the U.S. economy through “unconventional” means. Fisher doesn’t like “Operation Twist” – the Fed’s plan to sell shorter-term bonds and buy longer-term bonds in a bid to push yields at the long end lower – and he doesn’t care who knows it. Fisher sits down with us at 1:00 pm on Headline.

Our conversation with Fisher comes less than 24 hours before Bank of Canada Governor Mark Carney must explain to markets why interest rates won’t be raised anytime soon even as inflation accelerates beyond the central bank’s preferred target pace.

Canada’s benchmark rate is expected to remain unchanged and the accompanying statement is expected to be explicit in its assessment of the threats to the Canadian economy from the European debt crisis and U.S. unemployment. A survey released today by the National Association for Business Economics shows U.S. companies’ hiring plans at their worst level since January 2010.


Caterpillar doesn’t seem to be feeling the pinch, though. A few minutes ago, the world’s biggest maker of heavy yellow earth-moving equipment, reported higher-than-expected third-quarter earnings, record revenue and thousands of new jobs. The company said it expects year-end profit at the high end of its previously announced range and “2012 is shaping up to be better.” The quarterly earnings report from Caterpillar is always full of economic analysis and detail from around the world and this one is no different. Paul Bagnell has the file.

As I was typing that last bullet point, three deals were announced: Healthcare provider Cigna agreed to buy Healthspring for $3.8 billion; Oracle agreed to buy cloud computing company RightNow Technologies for $1.5 billion and J.M. Smucker agreed to buy a majority stake in Sara Lee’s coffee business for $350 million up front and another $50 million over the next 10 years.
Back to earnings, we’ll be taking a look at numbers from Netflix, Texas Instruments and West Fraser Timber.

This week sees Canadian earnings season pick up with numbers beginning tomorrow from CP, CNR and Astral Media. Wednesday will be busy with Rogers Communications, Corus, Agnico-Eagle, Mullen Group, Methanex, Goldcorp, Sherritt, Lundin Mining and Open Text.