08 November 2011

European rescue package: truth and fallacy

It occurred to me that the EUR100 bn private sector participation to the latest Greek rescue might no be as large as trumpeted by European leaders on 27th October. 
The statement:
“…we invite Greece, private investors and all parties concerned to develop a voluntary bond exchange with a nominal discount of 50% on notional Greek debt held by private investors.”
The facts:
1. Greek’s sovereign debt holders split:
  • Commercial banks: EUR81 bn
  • ECB: EUR45 bn
  • EU/IMF: EUR65 bn
  • Others (SWFs, asset managers, central banks, public sector funds): EUR159 bn
2. As per EBA data published in July stress test, Greek banks shared 59% of the total held by commercial banks, i.e. EUR48 bn. The reduction in Greek debt will be at least partly compensated by a bank recapitalization (I estimate it at around EUR30 bn – same as the EBA): the net effect on the Geek sovereign debt reduction is therefore rather minimal at approximately EUR18 bn (assuming that Greece and not the EFSF recapitalizes). 
3. According to a research published by Barclay’s Bank in July, EUR11.3 bn are held by EZ Insurance companies: 50% is EUR5.7 bn.
4. Non-Greek European banks will take a EUR16.5 bn loss.
5. Remains private assets managers and smaller holders of Greek bonds which I believe are not significant: say EUR 30bn to be generous or a EUR15 bn loss.
The total losses realized by the private sector would therefore amount to EUR55 bn, far from the EUR100 bn trumpeted.
If non-Greek European private sector banks would write-down +/- EUR16.5 bn, one may wonder why the EBA requires them to raise EUR76 bn whilst they are profitable enough (but for a few exceptions) to absorb losses on Greece and reach the 9.5% Basle III capital requirements.
Because, there is more to come; then EUR106 bn will not be enough; watch non-performing private sector loans in Greece and elsewhere as well as Italy, France, Portugal, Belgium, etc. sovereign debt… Italy’s interest rates on its debt are close to unsustainable at 6.6% and France together with Belgium are rapidly going the same way: any 1% increase translates into +/- EUR19 bn additional interest payment in a full year for Italy and EUR17 bn for France.
The EUR1 tr EFSF will not be enough, nor the EUR200 bn recapitalization recommended by the IMF: but for a euro split/collapse, the only remaining solution would be for the ECB to monetize sovereign debt for BIGSPIF. Germany has already started to eat its hat; when enough will be enough for Germans?…
BIGSPIF: Belgium, Ireland, Greece, Spain, Portugal, Italy, France 
07 November 2011

European Banking Authority: The EBA details the EU measures to restore confidence in the banking sector


The Institute of International Finance: Press Statement on Euro Area Stablization Measures


European Commission: Euro Summit Statement