October 17, 2011

Banks Push Back Against Greek Debt Cuts

New plan expected to propose write-downs of 50% or more

As hard at work as the European Union has been on its plan to save the European economy from a disastrous meltdown, at least a couple of the provisions in its current strategy are meeting with strong resistance from European banks.

Proposed write-downs of 50% or more have taken the place of previously agreed-upon cuts of 21% in the value of Greek sovereign debt, and the banks are voicing their disapproval. They are also opposed to another provision: beefing up the capitalization of banks against the possibility of further tough times.

According to a Sunday Bloomberg report, Josef Ackermann, head of Deutsche Bank and top lobbyist for the biggest financial firms in the world via the Institute for International Finance, will head to Brussels this week to present those objections in person to EU officials. He has already said it would be “counterproductive” to compel banks to boost their capital, and that it would be tough to get investors to accept higher write-downs of debt.

With the clock ticking on the EU to complete a plan to address debt contagion, bank opposition could stymie efforts by French President Nicolas Sarkozy and German Chancellor Angela Merkel to push through a finished strategy by the time of the October 23 meeting of European leaders.

Christopher Wheeler, a London-based analyst with Mediobanca, was quoted in the report commenting, “What’s most depressing about this whole thing is the squabbling between politicians, regulators and banks. Banks have to take positive action alongside the EU to find a solution, which is a combination of dealing with sovereigns as well as capital concerns.” He said that compromise is in the best interest of the banks.

Holger Schmiedling, a London-based chief economist for Berenberg Bank, said that while leaders need to reassure investors that Italy is not a risky investment, raising bank capital and cutting Greek debt values could help to convince investors that the financial system as a whole is stable.

He said in the report, “Being a realist, I don’t see the chance of avoiding larger private-sector involvement, especially given the German political reality. We also probably need some type of recap after raising market expectations over the last few weeks. But the ultimate thing is impressing on the market that Italy is safe.”

However, on Oct. 10 the institute rejected the idea that banks should accept larger write-downs. Hung Tran, deputy managing director, said in the report that the institute had no intention of changing its stance.

He said, “The potential risk and potential costs of revisiting the deal far outweigh any potential benefits. July 21 represented a balanced approach with significant concessions from private investors. We should remind the public sector that we need to preserve the voluntary nature of the Private Sector Agreement, and therefore honor and implement the deal.”

The European Banking Federation, which represents more than 5,000 banks, has also voiced its objection to additional capitalization requirements, calling them not “central to the solution.” Guido Ravoet, secretary-general of the federation, said in the report that “European banks feel they are being held hostage by the sovereign debt crisis.”

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