October 4, 2011

EU Hints Greek Bondholders May Get Stung With Sharper Losses

Second rescue loan approval postponed again; French banks resist writedowns

EU FlagThose institutions and investors holding large quantities of Greek bonds may be in for bigger losses than an originally agreed-upon deal provided for, according to hints from European finance ministers who met Monday to discuss Europe’s ongoing debt crisis.

That meeting was originally supposed to authorize payout of the second round of loans in Greece’s bailout program, but that decision, which had been put off till their Oct. 13 meeting, has been postponed again. French banks, meanwhile, are resisting any additional writedowns.

Bloomberg reported that finance ministers are considering reconfiguring an arrangement reached in July that called for a 21% loss by private bondholders on Greek debt. The investors were to have contributed some 50 billion euros ($66 billion) to a 159 billion-euro rescue, by means of strategies that included debt rollovers and exchanges. While it is still the plan for bondholders to contribute, the amount may have changed in the face of the escalating crisis as the euro zone tries to hold the joint currency together and avoid the possibility of defaults by Spain and Italy, which are too big for the current rescue fund to save.

Jean-Claude Juncker, chairman of the 17-nation Eurogroup, said of the July agreement that, since Greece’s situation and the world markets have both deteriorated substantially, a review and possible restructuring was necessary. He was quoted saying, "As far as the PSI [private sector involvement] is concerned, we have to take into account the fact that we have experienced changes since the decisions we took on the July 21, so we are considering technical revisions…"

France is strongly opposed to any such modification; its banks have huge exposures to Greek bonds. Three of them, Dexia SA (a Swiss/French bank), BNP Paribas, and Société Generale SA, are being pushed by regulators to take more losses on their Greek bond holdings; they have resisted marking them down as much as other banks have—some to only 51% of face value—instead devaluing them by perhaps only 21%.

Their shares have been severely hit in the markets because of their exposure. Peter Hahn, a professor of finance at London’s Cass Business School and a former managing director of New York-based Citigroup Inc., said in the report, “It’s no coincidence that the banks with some of the biggest holdings of Greek debt took the smallest writedowns. You’ve got banks, which are supposedly comparable, putting different values on their assets. That destroys the credibility of the banking system, and is one of the reasons why the shares are being hit so badly.”

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