EU exec, France want voluntary bank deal on Greece

BRUSSELS - The European Commission and France want a deal in which private creditors take losses on Greek bonds to remain voluntary to avoid triggering big payouts on bond insurance, officials said Thursday. That clashes with several other countries' push for steeper writedowns.

On July 21, European leaders agreed that as part of a second bailout for Greece, banks and other private investors would voluntarily swap or roll over their existing Greek government bonds for ones with easier repayment terms, such as lower interest rates, longer maturities or a lower face value. Banks said that that would result in writedowns of some 21 percent of their Greek debt holdings.

The deal was widely criticized as too soft on banks and since then several eurozone states, including Germany and the Netherlands, have been pushing for much steeper losses on the bond holdings to make sure Greece is actually able to repay its debt in the long run.

A European Union official said Thursday that because market conditions have changed since July 21, the agreement had become more expensive for Greece and the rest of the eurozone.

As a result, some aspects of the deal would have to be renegotiated, said the official, who declined to be named in line with the EU's policy on technical briefings.

The official declined to comment on whether the re-negotiated deal would lead to bigger writedowns but implied it should remain voluntary and not impose losses unilaterally on banks.

He stressed a new deal would be "in the spirit of the 21st of July" agreement - which was voluntary - and would not lead to a credit event. A credit event - which happens when a country defaults on its debts and forces losses on bond holders - would trigger payouts on credit default swaps on Greek bonds, a form of insurance for bond holdings that many investors purchase.

Eurozone leaders this summer tried very hard to avoid such a payout.

The position of the Commission, which is the EU's executive, was supported by France. "What we reject is a credit event," said a French Finance Ministry official, who spoke on condition of anonymity to speak more frankly about delicate negotiations.

The EU official acknowledged, however, that the July 21 agreement did little to lower Greece's overall debt, since its main effect was to push bond repayments further into the future. He added that since the summer, concerns over Greece's debt sustainability had increased, and that there were discussions to "rebalance" the July agreement.

The Commission's position was discussed with eurozone finance ministers at a meeting last week and was "jointly held," the official said. That statement contrasts with comments from several politicians from Germany and other countries in recent weeks, who appeared to continue to push for a more radical solution for Greece's debt problems.

The Institute of International Finance, the big bank lobbying group that has taken the lead on the Greek bond deal, has recommenced negotiations on the issue. Charles Dallara, the IIF's managing director, is currently in Europe for talks on the deal with Greek bondholders and European officials, said spokesman Frank Vogl, without giving further details.

The European Central Bank issued a sharp warning against forcing contributions from bondholders, saying the resulting bank losses "could trigger a need for large-scale bank recapitalization" at governments' expense. That could lower government credit ratings, which could weaken prospects for the banking system and increase the need for recapitalizations in a vicious circle. It said it "strongly advised against all concepts that are not strictly voluntary."

The negotiations on writedowns on Greek banks are central to a broader push within the eurozone to find a solution to its escalating debt crisis. They go hand in hand with plans to force big banks in Europe to add to their financial cushions so they are able to absorb potential losses on bonds and sustain wider market turmoil.

The European Banking Authority is due to spell out new, much higher capital requirements for the continent's biggest banks ahead of a crucial summit of EU leaders on Oct. 23. Banks may be required to raise the new capital within three to six months, a second EU official said Thursday, adding that the EBA would set a clear timeframe over the next week or so.

The head of Germany's largest commercial bank on Thursday warned that forcing losses on banks and requiring them to devote more money to their capital cushions could backfire by making them restrict credit to the rest of the economy.

Josef Ackermann, CEO of Deutsche Bank, said officials must ask whether banks "will not be practically forced into (credit) restrictions through possible debt reduction in the eurozone and the new regulatory conditions."

"The bank's capital levels are not the problem, but the fact that government bonds have lost their status as risk-free assets," he told a conference in Berlin.

by GABRIELE STEINHAUSER and DAVID Mchugh Associated Press Oct. 13, 2011 04:21 PM



EU exec, France want voluntary bank deal on Greece