Europe's bankers resisting bigger debt losses

By John W. Schoen, Senior Producer

Following yet another failed round of talks to head off a Greek debt default, it is increasingly clear that European bankers are about to get a big haircut.

And they?re embracing the idea about as well as a squirming 3-year-old.

European political and financial leaders have set an Oct. 23 deadline to come up with yet another set of proposals to resolve a debt crisis that threatens the send the continental into a deep and painful recession. After months of failed efforts to help the Greek government make good on those debts, Europe?s politicians have now finally accepted that avoiding default simply isn?t feasible, according to Paul De Grauwe, professor of international economics at Leuven University.

?Everyone agrees today that the Greek government will not be able to pay its debt,? he said. ?And we had better face that fact and start that process of restructuring - and haircuts that will allow Greece to have a lighter debt burden?

That ?haircut? for bankers and other holders of Greek debt means accepting less than 100 cents on the euro. The question European leaders are wrestling with is: How big a hair cut will it take to stabilize Greece?s budget?

European leaders thought they had reached a working solution in July, when the European Union agreed to a series of endlessly-debated proposals that include, among others, a ?voluntary? swap of Greek debt for newly-issued bonds that would force bankers to take a loss of 20 percent. The hope was that a voluntary plan would dodge the legal definition of an outright default.

That distinction is critical. A legal default could reverberate through the financial markets because it would trigger a wave of claims on a debt loss insurance known as credit default swaps. Uncertainty about the size of swaps holdings, and which investors and banks held them, were a central cause of the global financial Panic of ?2008.?

Three months later, it appears the July plan doesn?t go far enough. Now, bankers who face much bigger losses are pushing back on proposals that they cut the value of their Greek debt holdings by as much as 50 percent. Many banks are believed to have too little capital in reserve to covers those losses, prompting calls by regulators to force bankers to raise more capital.

Without stronger capital cushions to withstand Greek debt losses, European governments fear they?ll have to step in to clean up the financial mess. Earlier this month, France and Belgium took over the failed bank Dexia after it?s investment losses burned through the last of its cash.

Faced with the prospect of seeing the value of their Greek bonds cut in half, European bankers are not going quietly. On Thursday, Deutsche Bank CEO Josef Ackermann warned that the combination of stricter capital requirements and deeper losses on bond holdings would force bankers to write fewer loans.

"A question remains over whether banks will be able to provide financing, or whether possible haircuts in the euro zone and the new regulatory environment will practically force them to be restrictive," Ackermann told a conference of corporate executives in Berlin. "We need to find the right balance between stricter regulation of the financial sector and the impacts these have on the economy as a whole."

A credit crunch couldn?t come at a worse time for the European economy, which is now teetering on the brink of another recession. That, in turn, is raising debt pressures on other countries with weak economies, including Ireland, Portugal and Spain. Unless those economies recover sharply, their governments will likely have to follow Greece down the path of debt restructuring, former IMF chief economist Kenneth Rogoff told a group of business reporters Friday.

While a Greek debt restructuring may now be unavoidable, it will represent the beginning of a long, difficult period of recovery as investors stop lending to the Greek government. Jittery lenders and investors may also have second thoughts about lending to countries now seen as being at risk of a future default, according to Roger Nightingale, economist at RDN Associates.

?It?s going to be pretty frightful,? he said. ?There?ll be no private sector lending to Greece, and they?ll be no private sector lending to any at-risk country for years to come. I think this is no solution at all. This makes things very much worse.?

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Source: http://bottomline.msnbc.msn.com/_news/2011/10/17/8366193-europes-bankers-resisting-bigger-debt-losses

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