The head of the Bank of France has denied rumours of a shady backroom deal to save the eurozone and allow Greece to default on it's debts.
Yesterday Chancellor George Osbourne was forced to issue a hastily drafted statement after a highly placed British Treasury official outlined behind-the-scenes moves allowing a Greek default.
The audacious plan would involve Europe’s banks being recapitalised with tens of billions of euros to reassure the markets.
Now Christian Noyer, chief of France's central Bank has said French banks are solid and there is no plan to recapitalise.
He told French Sunday newspaper Le Journal du Dimanche: 'They are very solid.
'They have a solid capital base, comparable to other European banks and they are profitable... None of them are hiding any toxic assets.'
Asked to comment on reports about a plan to recapitalise French banks, he said: 'There is no plan, and we don’t need one.'
During an informal briefing at a restaurant in Washington – where the World Bank and International Monetary Fund are devising strategies to cope with the financial crisis – the treasury official admitted that Greece’s creditors would lose half of their money, dealing a potentially devastating blow to the global economy.
But after accounts of the briefing flashed around the world, Mr Osborne was forced to say: ‘No one here has put forward a plan for that. Greece has got a programme and needs to implement it. However, it is also clear that the eurozone needs to deal with its own issues.
‘There’s a recognition here that the global debt crisis has entered a dangerous phase, but I am also optimistic we have made steps towards resolving it.'
Although Ministers are officially still insisting publicly that the country should honour its obligations, behind closed doors, the G20 has agreed Greece will never be able to repay its staggering £350billion of government debt.
Mass protest: Police stand guard as students and teachers demonstrate in front of the Greek parliament on Thursday
Preparations are now well-advanced for a ‘managed default’ under which Athens will receive additional aid from eurozone countries of about £5billion to help pay its bills for another few months.
The extra cash should also stop the problem spreading to other debt-laden eurozone economies such as Italy, Portugal and Spain.
Announcement: Chancellor George Osborne insists Greece does have a recovery plan and must carry it out
If Greece was allowed to go bust immediately – with no extra cash – the markets would then turn on those other economies.
During the period the £5billion will buy, the European Union and America will attempt to put together a war chest of up to £2trillion.
As one senior source at the talks said: ‘We need time to put together the firepower to defend other eurozone countries. After that, Greek debt will probably be written down by about 50 per cent.’
It means investors holding Greek bonds would lose half their money at a stroke.
A Greek default would potentially lead to the country leaving the euro and even cause the collapse of the entire single currency project.
The panic started after a dinner at The Palm steakhouse, on Friday evening, during which financial journalists dined with G20 officials.
Yesterday morning, a Breaking News banner flashing on Sky News that ‘G20 ministers were preparing for a Greek default’, sent the Treasury into a panic, with one aide flatly denying to The Mail on Sunday that any such plan had been discussed.
Within an hour, the officials had admitted that ‘such scenarios had been aired behind the scenes’.
Mr Osborne then issued his statement in a swiftly arranged television interview in which he stressed that ‘no plan had been put forward’.
France under President Sarkozy and Germany under Chanceller Merkel are said to have devised a £1.7 trillion plan to save the eurozone
Under the behind-closed-doors strategy, being driven by the Germans and French, the ‘firebreak’ being built around Greece would also be extended to Portugal and Ireland to prevent the crisis from spreading to Italy and Spain.
Europe’s banks would also have to be recapitalised with tens of billions of euros to reassure the markets.
In return, the Germans are understood to be demanding that the private sector creditors of Greece would bear a loss of as much as 50 per cent – more than double the 21 per cent proposal currently on the table.
Officials hope the plan would stem the panic in the markets.
Th U.K. would contribute through its membership of the IMF meaning it would cost British taxpayers considerably more than the £1bn agreed under the last bail-out plan.
Britain’s banks have only limited exposure to Greece, but would face bigger writedowns if Ireland were also to default.
But Christian Noyer, head of the Bank of France denied there are no plans to recapitalise French banks saying they can cope with Greek debt.
An uncontrolled Irish default could be highly damaging across Europe.
Gerard Lyons, chief economist at international bank Standard Chartered, said: ‘If they can raise a fund big enough to fight contagion to other countries, then a Greek default could be the best of a bad job.
But it would need to be a big fund, perhaps £2trillion.’
Recent debt defaults include Russia in 1998 and Argentina in 2001, but Greece will be the first developed nation to go bust in recent times and the first default ever by a member of the European Union.
Elsewhere at the occasionally tetchy IMF meeting, Mr Osborne demanded that heavily indebted countries follow Britain’s lead and ‘put in place credible plans’ to slash their borrowings.
Treasury officials are on tenterhooks to see how investors will react to the IMF meeting when markets re-open tomorrow.
One senior City investment manager said: ‘We are treading on ever-thinner ice and I can hear it cracking.’
Definitely on the cards... and it could help
ANALYSIS by SIMON WATKINS
Financial markets have long regarded a default by Greece as the most likely outcome of the current crisis. A recent research note by analysts at American investment bank Citigroup suggested the chances of Greece avoiding a default were just five per cent.
But if that default can be managed in a controlled way – and be accompanied by unequivocal steps to stop the crisis spreading further or to only a limited number of other eurozone states – then it could actually help stabilise markets by bringing the uncertainty to an end.
The best outcome, according to analysts, would be a controlled default in this way.
Shocking: IMF chief Christine Lagarde has caused concern among some politicians by saying some banks need more capital
Citigroup’s analysis, released ten days ago, suggests an orderly default could be allowed to include not just Greece but also Portugal and Ireland.
For it to be orderly for financial markets it would also have to be clear that none of the countries was going to leave the eurozone.
For it to be orderly for financial markets it would also have to be clear that none of the countries was going to leave the eurozone.
It would be crucial in such a controlled crash to ensure that support measures were in place to stop the default sparking a series of knock-on crises in larger states such as Spain or Italy, and in the banking system. In their note, Citigroup’s analysts commented: ‘Default is the most likely in our view but how orderly?
This will be dependent on the size and scope of the European Financial Stability Fund (EFSF), European Central Bank (ECB) action and availability of money to recapitalise banks that are potentially made insolvent by default.’
If the authorities can convince markets that the European Financial Stability Fund will be large enough to cope with any knock-on effects, then an approved default by Greece or even one or two other smaller eurozone nations could bring more stability.
The safety measures will, however, have to be huge to be sufficiently convincing.
The EFSF will also have to have a remit capable of stemming the spread of crisis. As well as being large enough to provide bail-outs for other eurozone countries, it may also have to be ready to provide capital to banks which are hit by major losses from those defaults – a step beyond anything yet carried out by the fund.
IMF chief Christine Lagarde recently shocked some eurozone politicians by saying that Europe’s banks would need more capital.
With that concern already voiced by such a senior figure, it would be essential that capital was clearly available in the EFSF if a Greek default is to be allowed in a controlled manner.
Citigroup’s analysis was also unequivocal about the risks if a Greek default turns into a disorderly rout, which they said would lead to a ‘severe’ banking crisis.
Read more: http://www.dailymail.co.uk/news/article-2041522/Bank-France-chief-denies-1-7trillion-backroom-deal-save-eurozone.html#ixzz1Z457ClWi
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