Eurozone taxpayers could be on the hook for more than 40 billion euros ($55 billion) if banks are compelled to take hefty write-downs on Greek debt—a measure banks are fighting even as officials try to convince them to accept massive cuts voluntarily.
If banks are forced to accept the big cuts, a banking trade organization said it would be “tantamount to default”—and citizens could be footing the bill not just for bonds, but also for 47 billion euros in bilateral loans that share the same seniority level as Greece’s bonds.
Bloomberg reported Tuesday that discussions in the European Union summit meetings held over the weekend and set to continue Wednesday are considering a number of options to save Greece from default and the eurozone from contagion. One of those options is a write-down of debt by banks in far larger amounts than in the second rescue deal brokered for Greece in July. That arrangement called for a 21% write-down; banks accepted that, but are fighting amounts called for in the wake of troika inspections of Greece’s finances in October, which found the country to be considerably worse off than previously believed.
Now officials are talking about write-downs of 50-60% in value, amounts that banks are fighting and calling anything but voluntary. If banks are forced to accept the arrangement, euro nation taxpayers will be obligated for what amounts to 100 euros for every man, woman, and child for the bilateral loans offered just 18 months ago.
Charles Dollar, managing director of the Institute of International Finance (IIF), an industry group that is part of the Greek debt discussions, issued a statement Monday saying in part that there are limits “to what could be considered as voluntary to the investor base and to broader market participants. Any approach that is not based on cooperative discussions and involves unilateral actions would be tantamount to default.” Financial companies, which the IIF represents, have proposed 40% markdowns. IIF members include 450 of the world’s biggest financial firms.
Klaus Fleischer, a professor for banking and finance at the University of Applied Sciences in Munich, was quoted in the report saying, “The IIF’s strategy is to say the burden is being unevenly shared and there’s a risk of a chain reaction. It’s an understandable positioning and defense strategy by the banks.”
IFF members said a default could keep Greece shut out of international capital markets for years; that would further damage the Greek economy, drive up costs for European taxpayers and trigger contagion, they claimed. Dallara said the group is in constant contact with Greek authorities and banks and is working to find “constructive” solutions.