Germany is working behind closed doors to a “tough default” plan for Greece, with private creditors, namely banks and pension funds, to assume losses of 60%, with the risk of causing a chain reaction in southern Europe, in the absence of reliable measures of protection. Officials in Berlin said that private investors are likely to suffer further losses related to Greek sovereign bond holdings over the 21% agreed in July, according to The Telegraph. The exact level of these losses will depend on the findings of inspectors from EC/IMF mission which ended in Athens.
Delegation of EC/ECB/IMF announced on Tuesday that Greece will receive the next tranche loan of 8 billion euros in November, after the troika reports will be approved by finance ministers of the euro area and the Board of the IMF. “Much has happened since July. Greece has not fulfilled its commitments so that we can consider that the 21% decrease revaluation in debt is no longer sufficient”, said one source.
German Finance Minister Wolfgang Schäuble told the Frankfurter Allgemeine Zeitung that the initial review is probably too low, and banks must have sufficient capital to withstand greater losses if necessary. In Berlin it circulated estimates of a 60% debt reduction to private creditors. The German policy changes is similar to the on last year, when Chancellor Angela Merkel first proposed a downward revision of the Greek sovereign bond value, which led to a new spurt of the crisis and forced Ireland to seek help of international finance.
“It could have the snowball effect. Markets will turn their attention instantly to Portugal, where two-year bond yields reached 17%”, said Andrew Roberts, director at RBS credit.
Greek ten-year term bonds are traded with a 60% discount on the market, but European banks should not revise assets down as long as there is a formal default, and the debts are part of long-term loan portfolio. The danger is that banks are obliged to “crystallize” damage before increasing capital.
Germany is likely to open a Pandora’s box with this proposal, believes Marcel Alexandrovich, an analyst at Jefferies Fixed Income. “It would be a disaster, a signal that investments in sovereign bonds are not safe. Investors would withdraw their investments in Portugal, Ireland, Spain and Italy”, warned Alexandrovich. The analyst said that France is against it, as the European Central Bank. “They know that banks need time to adapt. I do not think that Europe will pull the trigger”, added the analyst.
Merkel and French President Nicolas Sarkozy pledged Sunday to do whatever is necessary to ensure a plan to recapitalize banks and further support of Greece and the euro area by the end of this month. La Tribune newspaper reported in late September that the Germans are working on a secret plan called “Eureca”. Under the plan developed by very influential consultants in the government of Chancellor Angela Merkel, Greece should include all public assets in a structure to sell for 125 billion euro to an European institutions and thus reduce their debt levels from 145% of GDP to 88%.