DEAL IN SIGHT / DER SPIEGEL ( HIGHLY RECOMMENDED READING )

06/30/2011

Deal in Sight

German Banks Agree to Billions in Greek Debt Relief

Germany's two largest private banks -- Frankfurt-based Commerzbank and Deutsche Bank -- have reached a tentative agreement to provide voluntary debt relief for Greece.


German banks have reached a voluntary agreement to contribute 3.2 billion euros to the next Greek bailout package through bond roll-overs. But a far greater sum will still be needed in order to rescue the country, which is being crushed by 300 billion euros in debt.


The German government and private creditors reached an agreement on Thursday that will see the banks contribute €3.2 billion ($4.6 billion) -- around one-third of the €10 billion in total Greek government bonds that are still on the books of German banks -- towards the next bailout package for debt-strapped Athens. Compared to Greece's total national deficit of more than €300 billion, however, the German contribution is quite small.


Thursday's deal has been described as preliminary, but German Finance Minister Wolfgang Schäuble, who is a member of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU) party, said he was confident the details could be hammered out by Sunday. Deutsche Bank chief Josef Ackermann said that the deal would be based on the model worked out recently by French banks.


"We are convinced that Greece has to be helped further," Ackermann said Thursday. "We are taking the French draft as a basis but will build modifications and are very confident we will find a solution that will give satisfactory answers to all participants."


Under the French model, private lenders are rolling over 50 percent of the yields from Greek bonds that are due into new securities which will first mature in 30 years. A further portion would flow into a trust fund whose profits would be used to secure the entire investment.


German banks currently have around €10 billion in Greek government bonds on their books. Schäuble said that 55 percent of the bonds still in banks' possession are long-term and will first mature after 2020. However, the fundamental agreement reached on Thursday deals only with bonds that are due by 2014, holding a total value of €3.2 billion euros.


Majority of Greek Bonds in Public Hands


The majority of outstanding Greek bonds are now in public hands -- those of the European Central Bank, which holds securities with a value of close to 50 billion, in particular. Greek banks are holding government bonds worth a similar amount.


Sources in the financial industry told wire services that Deutsche Bank's contribution is expected to be less than €1 billion. The partially-nationalized Commerzbank will account for considerably less than a billion. And the German government's bad banks, which have assumed the toxic equities removed from restructured German banks during the crisis, will contribute €1.2 billion. These banks are holding a particularly high number of Greek bonds that are threatened with default.


Nevertheless, the voluntary debt swaps by private lenders would provide at least some relief for Greece. The French Banking Association estimates that €85.5 billion in Greek bonds will mature by mid-2014. The ECB holds around €25 billion of those bonds, with private institutions possessing the remaining €60.5 billion.


Greece's Largest Creditors

Rank Institution/Bank Bond Issues and Other Instruments (in billions of €) Credits (in billions of €)

1 European Central Bank (ECB) 49.0 -


2 EU Loans - 38.0


3 Public Greek Funds 30.0 -


4 Foreign Government Funds 25.0 -


5 International Monetary Fund (IMF) - 15.0


6 National Bank of Greece 13.2 5.4


7 National Banks in the Euro Zone 13.1 -


8 Piraeus Bank (Greece) 8.0 -


9 EFG Bank (Greece) 9.0 -


10 FMS (Hypo Real Estate) 6.3 -

Source: Barclays Capital




Whether or not the model will work is dependent on how the ratings agencies respond. The deal can only be implemented if it is certain that the ratings agencies will not respond by downgrading Athens' rating to that of a default or a partial default. If they did downgrade Athens, it would have widespread consequences. The ECB, for example, has threatened to no longer accept Greek government bonds as securities for providing refinancing, thus literally cutting Greek banks off from this important source of fresh capital. The debt problem would then increase dramatically.


Bank executives themselves are displeased at having to participate in the bailout, and Ackermann made comments critical of Merkel and Schäuble at a conference on Wednesday, news wire Reuters reported, citing the CEO as stating that Deutsche Bank, Germany's largest, would help Greece to "avoid the collapse of the entire system," but that he was not happy about it and could face writedowns. German banks first signalled their willingness to participate earlier this week.
....................
Politicians in the euro zone are currently developing a second bailout package similar to last year's €110 billion rescue for Athens, and they want to see private creditors cover around €30 billion of the total. The package is seen as crucial in helping to rescue the flagging fortunes of Europe's common currency, the euro.