Banks struggle with Greek bailout

Associated Press
German Chancellor Angela Merkel arrives for a news conference with Jean Ping Chairperson of the Commission of the African Union, not pictured,  after talks at the chancellery in Berlin, Germany, Tuesday, July 5, 2011. Angela Merkel rebuffs the rating agencies central role in judging the new bailout plan for Greece that will see private creditors see share part of the burden. Merkel said Tuesday it was important that the institutions helping Greece, the International Monetary Fund, the European Central bank and the European Council, will make their own assesment regarding Greece's credit rating. (AP Photo/Markus Schreiber)
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BERLIN (AP) — The eurozone's biggest banks will struggle Wednesday over how much they are willing to contribute to a new support package for debt-ridden Greece.

At a meeting in Paris, senior executives from European lenders will try to come up with terms under which they would be prepared to buy up new Greek bonds, currently seen as one of the riskiest investments in the world.

The banks find themselves in a tricky position: On one hand, they have to satisfy countries like Germany and the Netherlands, which want to keep the amount of money they lend Greece as low as possible. On the other, they want to avoid losses that would hurt their results and could get them in trouble with shareholders.

Eurozone governments have said that private-sector contributions to a new rescue package for Greece — likely an extra euro115 billion through mid-2014 on top of the euro110 billion already granted a year ago — would have to be "substantial" but should not be considered a default.

Both goals have proved to be difficult. German banks said last week that they would be willing to participate in a so-called bond rollover, but their contribution would only amount to some euro2 billion, since most of their holdings expire after 2014.

At the same time, rating agencies, which have become the umpires in this exercise, have already indicated that even a relatively soft rollover, as one proposed recently by the French banking federation, would move Greece into a rating of "selective default" at least for some time and could force banks to record losses on affected bonds.

The banks may not agree on the final terms of a rollover at their meeting Wednesday, held under the auspices of the Institute of International Finance. "The meeting tomorrow ... is part of a series of meetings of leading private creditors to Greece to support the reform program," said Frank Vogl, a spokesman for the IIF, adding that similar get-togethers are planned over the coming weeks.

Under the French proposal, which has gained traction also with German lenders, banks would reinvest 50 percent of their holdings in new Greek bonds with a maturity of up to 30 years, in return for hefty interest rates and being secured by a separate safety fund.

Already, eurozone governments are growing uncomfortable with the power they have handed to rating agencies. German Chancellor Angela Merkel said Tuesday that the three institutions that oversee the Greek bailout — the International Monetary Fund, the European Central Bank and the European Commission — should make their own assessment of the rollover, regardless of what the credit rating agencies say.

"I trust above all the judgment of those three institutions," Merkel said.

Her comments came after Standard & Poor's said the current French proposal to have banks roll over their Greek debt holdings "would likely amount to a default," while fellow rating agency Moody's said banks may have to record impairment charges on the affected bonds.

The ratings are important for the European Central Bank, which won't accept bonds as collateral that have been rated as "selective default" or worse by all major agencies. That would cut Greek lenders off the ECB's liquidity support and could spark a major banking crisis in the country.

But the EU and the ECB have warned that a negative rating could also cause investors to pull money out of other vulnerable eurozone states, such as already bailed-out Portugal and Ireland as well as much larger Spain and Italy.

Another concern is credit default swaps, insurance contracts that banks and other investment funds have taken out for Greek bonds. Whether those contracts have to be paid out is not decided by rating agencies, but by a separate institution, the International Swaps and Derivatives Association, which is controlled by the world's biggest investment banks and funds.

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Steinhauser reported from Brussels.

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