As negotiations to launch a second Greek rescue package picked up momentum in Brussels and Athens on Friday, European Union finance ministers and the European Central Bank ratcheted up pressure on their domestic banks to roll over their Greek bond holdings to help ease the country's debt-crisis pressure cooker.
Greece has an enormous debt load - an estimated €330-billion or about 150 per cent of gross domestic product - and its debt burden is growing amid a shrinking economy and budget deficits despite aggressive spending reductions.
As the value of Greek's debt obligations plummets, European officials are desperate to contain the fallout. Without a plan to deal with bank-debt holdings, banks could be forced to take writedowns that would hurt their capital positions and trigger a ripple effect of damage through the continent's financial system.
The rollover plan came after German efforts to force bondholders to share some of the bailout pain with Greek taxpayers ran into a storm of resistance from the ECB, France and other countries whose banks are heavily exposed to Greece.
French banks are Greece's biggest creditors, with exposure estimated at $57-billion (U.S.) to Greek public and private debt. German banks rank second, with exposure of $34-billion. Of Greece's total debt, about €57-billion is held by non-Greek banks, 17 per cent by Greek banks and 18 per cent by the ECB, which was loading up on Greek bonds earlier this year to provide liquidity and try to prevent yields from soaring, which they did anyway.
A rollover means that banks would be repaid in full when the bonds mature, even though they are probably worth 50 per cent or less of their face value. The banks would immediately reinvest the money in new securities with the same maturities and interest rates, though certainly not at the sky-high yields the market is now demanding.
Rollovers probably would not be defined as a "credit event," or a default, by the most of the ratings agencies because they are voluntary and would not involve principal and coupon reductions.
Some analysts expect almost all the big banks to roll over much of their Greek bonds. "The banks across the euro zone would be morally persuaded to take part," said ING debt markets strategist Padhraic Garvey. "We just went through the bank crisis that saw the banks get help. It's now time for the bank to pay back, so to speak."
Mr. Garvey expects about two-thirds of the bonds to be rolled over as they come due. Because Greece redeems roughly €30-billion of bonds a year, the rollovers would save it some €20-billion annually.
The details of the rollovers, and the number and identity of the banks taking part in the effort, probably will not be known until early July, when euro-zone finance ministers meet to define and launch a new rescue package for Greece. The meeting assumes the Greek government, led by embattled Prime Minister George Papandreou, will pass the new austerity program. It is designed to save €6.4-billion in the 2011 fiscal year alone, through tax hikes and spending cuts that are being resisted by opposition parties and by tens of thousands of protesters who have laid siege to central Athens since late May.
The banks argue that they need all the help they can get as the Greek debt crisis accelerates, infecting sovereign bonds and bank values in the weak, debt-swamped countries. On Friday, the normally robust Italian banks got caught in the Greek contagion when Moody's, the ratings agency, changed its outlook to negative for the banks. Shares of Italian banking giants UniCredit and Intesa Sanpaolo lost more than 4 per cent.
The refusal by the ECB and most euro zone governments to force holders of Greek debt to take "haircuts" - a discount to the face value of their bonds - has been heavily criticized as unfair and immoral, because it shifts the whole cost of the bailout to taxpayers.
"The refusal of the political class to impose losses on large bank creditors since the collapse of Lehman Brothers and Washington Mutual in 2008 illustrates the extent to which financialization of the western industrial economies has turned into a gradual coup d'état by the banks and the global speculators who dominate their client base," investment banker and author Christopher Whalen wrote this week in the Institutional Risk Analyst newsletter.
Critics also say that rollovers are simply kicking the can down the road. They believe Greece's debt is unsustainable and that default is inevitable, so why not get it over with now?
Paolo Pizzoli, ING's senior economist in Milan, predicts that, rollover or not, bondholders are doomed to take a 30-per-cent haircut in 2013 because of Greece's ailing economy and growing debt load. Others put the figure higher, noting that the market is pricing in a 50-per-cent haircut. For the moment, however, it looks like the banks that own Greek debt are getting their free lunch, care of the taxpayer.
Eric Reguly