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How deep will Greek 'haircut' be?
Article | October 17, 2011 - 2:42pm | By By Dionyssis Kefalakos
All this week, financial markets will be speculating on the percentage of the Greek ‘haircut’ - we only know for certain that it will be larger than the 21% agreed on 21 July by heads of state and governments, and lower than the 50% that Germany is proposing.
Allegedly, the 23 October European Council will decide not only about the exact figure but also on the accompanying measures to safeguard the Eurozone's banking system. What happened some days ago, and the decisions taken on the future of the Franco-Belgian bank Dexia, is an indication of what might happen with the banks.
Coming to the determinants that the European Council will use to decide the percentage of the Greek haircut are, on the face of it, three.
For one thing it must offer Greece such a reduction of its sovereign debt down to manageable levels. A 50% haircut of Greek debts will bring it to around 80% of the GNP, which is too-generous a gift for Athens. Given that the Greek debt is presently 160% of the GNP and growing, a reduction towards the 120% of the GNP or less could be considered as bringing it to sustainable levels.
The second determinant that the European Council will use is the need for the recapitalisation of the Eurozone's banks that this will trigger. The banks with the largest exposure to Greek debt are the four major banks of the country, and the three largest banks of France. German banks have a huge, but still smaller exposure to Greek values, with London even less exposed.
For one thing, it seems by now that there is a generally accepted idea of how the recapitalisation of the banks is going to be achieved. On more than one occasion, Eurozone decision-makers have told us that first of all those banks should tap their own shareholders and the relevant markets for new capital.
Then, they will ask their governments to make up the rest. Only when this is not possible, as for example in the case of Greece where the government is penniless, will the banks ask European support mechanisms such as the EFSF to supply them with capital. It goes without saying that, during these procedures, each and every Eurozone lender will be supplied with ample liquidity, by the European Central Bank (ECB), a prospect made very clear by its governor Jean-Claude Trichet. Soft collaterals will be requested.
The third determinant in setting the exact percentage of the Greek haircut will be the possibility of this being identified, or not, as a “credit event”. Such an eventuality would trigger payments of CDSs, a dreadful prospect for many financial firms in Eurozone and the US.
Incidentally, a haircut of 50% will most likely be considered as a credit event, and a world association representing the financial institutions has said that a 50% reduction of the Greek is unacceptable for Eurozone banks.
In short, what we have so far on the extent of the Greek haircut converge to a percentage close to 40%. The 50% seems to be a litte out of range.
Article | October 17, 2011 - 2:42pm | By By Dionyssis Kefalakos
All this week, financial markets will be speculating on the percentage of the Greek ‘haircut’ - we only know for certain that it will be larger than the 21% agreed on 21 July by heads of state and governments, and lower than the 50% that Germany is proposing.
Allegedly, the 23 October European Council will decide not only about the exact figure but also on the accompanying measures to safeguard the Eurozone's banking system. What happened some days ago, and the decisions taken on the future of the Franco-Belgian bank Dexia, is an indication of what might happen with the banks.
Coming to the determinants that the European Council will use to decide the percentage of the Greek haircut are, on the face of it, three.
For one thing it must offer Greece such a reduction of its sovereign debt down to manageable levels. A 50% haircut of Greek debts will bring it to around 80% of the GNP, which is too-generous a gift for Athens. Given that the Greek debt is presently 160% of the GNP and growing, a reduction towards the 120% of the GNP or less could be considered as bringing it to sustainable levels.
The second determinant that the European Council will use is the need for the recapitalisation of the Eurozone's banks that this will trigger. The banks with the largest exposure to Greek debt are the four major banks of the country, and the three largest banks of France. German banks have a huge, but still smaller exposure to Greek values, with London even less exposed.
For one thing, it seems by now that there is a generally accepted idea of how the recapitalisation of the banks is going to be achieved. On more than one occasion, Eurozone decision-makers have told us that first of all those banks should tap their own shareholders and the relevant markets for new capital.
Then, they will ask their governments to make up the rest. Only when this is not possible, as for example in the case of Greece where the government is penniless, will the banks ask European support mechanisms such as the EFSF to supply them with capital. It goes without saying that, during these procedures, each and every Eurozone lender will be supplied with ample liquidity, by the European Central Bank (ECB), a prospect made very clear by its governor Jean-Claude Trichet. Soft collaterals will be requested.
The third determinant in setting the exact percentage of the Greek haircut will be the possibility of this being identified, or not, as a “credit event”. Such an eventuality would trigger payments of CDSs, a dreadful prospect for many financial firms in Eurozone and the US.
Incidentally, a haircut of 50% will most likely be considered as a credit event, and a world association representing the financial institutions has said that a 50% reduction of the Greek is unacceptable for Eurozone banks.
In short, what we have so far on the extent of the Greek haircut converge to a percentage close to 40%. The 50% seems to be a litte out of range.
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