Red Alert For Debt And Banks
With the debt crisis spreading again today in Spain, Italy and Belgium, the German government attempts to appear “indifferent” toward the reactions of capital markets, despite yesterday’s multi-notch downgrade of Greece by Fitch Ratings.
Its stance leaves without response the call of other EU members especially France and Italy for an extraordinary summit.
Diplomatic sources in Berlin speak of a possibility of a meeting next week, after the technical details of how to deal with a second bailout package to Greece are specified.
The stance of Germany (and the Netherlands as well) is based on the “position” that the financing of Greece is ensured by mid-September and “therefore there is still time for decisions”.
In contrast, France, Italy and Spain have a different view, as they see the debt crisis spreading rapidly from the peripheral Eurozone to the central, weighing even on French bonds, while Italian and French banks have suffered unprecedented pressure on share prices. The European Bank for Reconstruction and Development warns that if the situation continues, the Central European banks would withdraw funds from Eastern Europe, risking a collapse of such economies as they hold over 75% of the banking market.
The problem is no longer Greece, Italian bankers note, but the euro and the European banking system, just one day before the announcement of the stress tests results.
However, the pressure on Germany has increased, as the president of Deutsche Bank Josef Ackermann is invited to a meeting with the president of the Eurozone Jean-Claude Juncker today, while it has leaked that at least one German bank has failed to cope with the stress tests.
According to Brussels sources, this pressure has begun to work on a slight change in attitude, regarding the possibility to grant the temporary rescue fund, the EFSF, to intervene directly or indirectly in the secondary bond market to defuse the pressure.
Under this scenario, the German side could incorporate the participation of private investors in reducing the cost of the Greek debt without risking a credit event or a selective default, because:
-The EFSF could intervene in the secondary market to buy Greek bonds at market prices, implementing substantially a haircut, as the prices are trimmed by 40-50%.
-The EFSF can lend Greece to repurchase its debt with similar results.
Of course, bond market sources say that if such a process is launched, prices would automatically move upwards, setting a “new equilibrium” for the bond prices that would cause a positive re-evaluation.
They also note that the process would involve the bonds maturing in 2011-2014.
However, Germany argues that this would require a similar intervention in other troubled economies and the capacity of the ESFS should be doubled if necessary to support Italian and Spanish bonds.
Otherwise, the Greek State could intervene and change the repayment status of certain bonds (for a partial repayment), but in this case a “selective default” would be declared,
A Greek government official told Capital.gr that such a process requires ECB’s coverage in the domestic banking system. But this seems not to be the main or desired scenario for the ECB administration, which insist on EFSF assuming a “guarantor” role for the rollover of Greek debt .
(capital.gr)
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