Europe eyes bigger Greek losses for banks

Wed Oct 12, 2011 1:39pm EDT
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By Jan Strupczewski and Harry Papachristou

BRUSSELS/ATHENS (Reuters) - Euro zone countries will ask banks to accept losses of up to 50 percent on their holdings of Greek debt, officials said on Wednesday, as part of a grand plan to avert a disorderly default and stem a crisis that threatens the world economy.

Ahead of a make-or-break summit of European leaders on October 23 at which a comprehensive new Franco-German crisis plan is expected to be discussed, four euro zone officials told Reuters that a "haircut" of between 30 and 50 percent for Greece's private creditors was under consideration.

That is far more than the 21 percent loss they had asked banks, pension funds and other financial institutions to accept in July as part of a second rescue package for Athens. Since then, the Greek economy has sunk deeper into recession, fanning fears of an outright default and forcing euro zone leaders to consider more radical action to stem their crisis.

To restore confidence in the banking system, they are also working on plans to shore up the balance sheets of banks through recapitalizations.

An EU source told Reuters that the European Banking Authority, which is conducting an assessment of bank capital needs, was likely to mark down their holdings of sovereign debt to market value and apply a 9 percent core Tier 1 capital ratio when deciding whether they need more funds.

European Commission President Jose Manuel Barroso said on Wednesday that the bloc should take a fully coordinated approach to recapitalizations and only use its rescue fund, the European Financial Stability Facility (EFSF), as a last resort -- a key demand by Europe's biggest economy Germany.

He also called for a permanent rescue fund to replace the EFSF from the middle of next year instead of in 2013, an idea that German Finance Minister Wolfgang Schaeuble also backed.

The German banking association hit back at elements of Barroso's proposals, saying his idea to ban banks from paying out dividends pending recapitalization would hamper efforts to raise capital.   Continued...