EU executive wants voluntary bank deal on Greece

By Gabriele Steinhauser

Associated Press

Published: Thursday, Oct. 13 2011 6:10 a.m. MDT

European Commission President Jose Manuel Barroso attends the parliamentary session at the European Parliament in Brussels, Wednesday, Oct. 12, 2011. The European Union hopes to push its member states to take firmer action on the debt crisis when it presents Wednesday a broad new plan to fight market turmoil, from strengthening weak banks to lowering Greece's debt burden. The plan is the boldest attempt yet to stem the crisis, which has linked the fortunes of highly indebted states like Greece, Ireland and Portugal with those of the banks that own those countries' bonds.

Yves Logghe, Associated Press

Enlarge photo»

BRUSSELS — The European Commission, the EU's executive, wants a deal in which private creditors take losses on Greek bonds to remain voluntary in order to avoid triggering massive payouts on bond insurance. That clashes with several countries' push for steeper writedowns.

On July 21, European leaders agreed that as part of a second bailout for Greece, banks and other private investors would voluntarily swap or roll over their existing Greek government bonds for ones with easier repayment terms, such as lower interest rates, longer maturities or a lower face value. Banks said that that would result in writedowns of some 21 percent of their Greek debt holdings.

The deal was widely criticized as too soft on banks and since then several eurozone states, including Germany and the Netherlands, have been pushing for much steeper losses on the bond holdings to make sure Greece is actually able to repay its debt in the long run.

A European Union official said Thursday that because market conditions have changed since July 21, the agreement had become more expensive for Greece and the rest of the eurozone.

As a result, some aspects of the deal would have to be renegotiated, said the official, who declined to be named in line with the EU's policy on technical briefings.

The Commission official declined to comment on whether the re-negotiated deal would lead to bigger writedowns but implied it should remain voluntary and not impose losses unilaterally on banks.

The official stressed a new deal would be "in the spirit of the 21st of July" — which was voluntary — and would not lead to a credit event. A credit event — which happens when a country defaults on its debts and forces losses on bond holders — would trigger payouts on credit default swaps on Greek bonds, a form of insurance for bond holdings that many investors purchase.

Eurozone leaders this summer tried very hard to avoid such a payout.

The official said that the Commission's position had been discussed with eurozone finance ministers at a meeting last week and was "jointly held." That statement contrasts with comments from several politicians from Germany and other countries in recent weeks, who appeared to continue to push for a more radical solution for Greece's debt problems.

The Institute of International Finance, the big bank lobbying group that has taken the lead on the Greek bond deal, has recommenced negotiations on the issue. Charles Dallara, the IIF's managing director, is currently in Europe for in talks on the deal, spokesman Frank Vogl said in an emailed message, without giving further details on whom Dallara was talking to.

The head of Germany's largest commercial bank on Thursday warned that forcing losses on banks and making banks to devote more money to their capital cushions could backfire by making them restrict credit to the rest of the economy.

Josef Ackermann, CEO of Deutsche Bank, said officials must ask whether banks "will not be practically forced to (credit) restrictions through possible debt reduction in the eurozone and the new regulatory conditions."

"The bank's capital levels are not the problem, but the fact that government bonds have lost their status as risk-free assets," he told a conference in Berlin.

Jens Weidmann, president of the German central bank, warned in an interview with Germany's Bild newspaper that write-offs on Greece's debt were not an overall solution to the country's economic problems.

"Greece must get a grip on its state sector and make its economy competitive — a debt forgiveness must not become an attractive way out of self-inflicted problems," Weidmann said.

European officials are trying to keep Greece's financial troubles from triggering a wider banking collapse. The EU's banking regulator plans to force big banks to add to their financial cushions amid worsening turmoil on financial markets.

A second EU official said that banks may be required to raise new capital within three to six months, adding that the European Banking Authority would set a clear timeframe ahead of a summit of EU leaders on Oct. 23. The second official also declined to be named.

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David McHugh in Frankfurt, Germany, and David Rising in Berlin contributed to this story.

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