Europe's leaders are threatening to trigger a formal default on Greek debt and risk a “credit event” if banks refuse to accept losses of up to €140bn (£120bn) on their holdings.
Hardline eurozone members, backed by the International Monetary Fund (IMF), delivered the ultimatum this weekend after an official report found that in a worst-case scenario Greece could need a second bail-out of €450bn – twice the current package and more than the entire €440bn in the eurozone’s rescue fund.
Vittorio Grilli, a senior EU official, travelled to Rome yesterday to present the “take it or leave it” deal to the Institute of International Finance, which is leading the negotiations for the banks. “The only voluntary element for the banks now is to take a 50pc haircut or face a credit event, a default,” said an EU diplomat.
The threat marks a dramatic change of stance in Brussels, and follows early warnings that a Greek default would set off a chain reaction that would result in a worse financial crisis than in 2008.
Although wary about the markets, they are now thought to believe that a “big bazooka” solution could contain the crisis in Greece.
The “haircut” would be accompanied by details of plans to recapitalise the banks and reinforce the European Financial Stability Facility (EFSF), the €440bn bail-out mechanism.
If the banks called the EU-ECB-IMF troika’s bluff, they would potentially face nationalisation. A “credit event” would risk triggering credit default swaps – the scale of losses from which cannot be accurately quantified.
Finance ministers, including Chancellor George Osborne, were locked in discussions all day yesterday over the details of the bank recapitalisation. He emerged from talks saying that “real progress” had been made on plans to strengthen European banks.
Ministers were thought to have agreed that banks may need about €100bn in capital, increasing their core tier one capital ratio to 9pc. But, the details of these plans were not yet clear.
Europe’s banking lobby, dominated by French financial institutions with a high exposure to Greek debt, have protested that any haircut greater than 40pc is too much.
But Mr Grilli, who chairs the EU’s powerful economic and financial committee, which does the backroom work for European finance ministers, will tell the banks the IMF recommends a 60pc haircut.
The ultimatum will say that a 50pc private sector contribution is the minimum that can be accepted and, even then, the EU will have to put in an extra €4.5bn for Greece. To ensure the banks can withstand the losses, they will be made to raise at least €100bn over the next six to nine months.
French banks are particularly exposed, but UK officials are confident British banks will escape unscathed.
In July, European banks offered a “voluntary contribution” of 21pc writedowns – an offer the banking sector has struggled to deliver and which is widely mistrusted by governments due to the collateral lenders are asking in return.
Jean-Claude Juncker, the chairman of the euro group of finance ministers, said: “We have agreed that we have to have a significant increase in the banks’ contribution.”
The development is a victory for the IMF, which typically requires a default and a currency devaluation as well as austerity as part of a rescue programme. In Greece’s case, the ECB and European Commission (EC) have insisted the programme is limited to austerity. The ECB and EC fought with the IMF to keep haircut scenarios out of a joint troika report on Greece, delaying its completion by a month .
The Telegraph
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