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15th Apr 2024

Eurozone chiefs reach deal with bank bosses on Greek haircut

  • The world's banks eventually agreed to accept a haircut of 50 percent on their Greek holdings (Photo: andres rueda)

Eurozone leaders have reached a deal with the world’s major banks under which they will accept a haircut of 50 percent on their holdings of Greek sovereign debt.

Early Thursday (27 October) morning, EU Presidents Herman van Rompuy and Jose Manuel Barroso announced that an agreement had finally been hammered out with the Institute for International Finance, the association representing the sector, after hours of stonewalling by the banks, who had refused to accept a write-down of Greek bonds exceeding 40 percent.

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“It was agreed tonight there will be a nominal discount of 50 percent of notional Greek debt,” a weary Van Rompuy told reporters just after 4am in the European capital.

Earlier in the night, the managing director of the IIF, Charles Dallara, who led negotiations with EU premiers and presidents over the issue, had put out a statement saying bluntly: “There is no agreement on any element of a deal."

European leaders had been pushing for the banks to accept losses of 60 percent.

The International Monetary Fund for its part is understood to have favoured a haircut of 75 percent, arguing that a more substantial write-down was the only way to ensure that Greece’s debt can be held at a sustainable level.

Without such a reduction in its debt pile, the Washington-based lender feared that Athens will not indefinitely have to be attached to a drip-feed of bail-outs to keep its economy alive.

German Chancellor Angela Merkel, French President Nicolas Sarkozy, IMF boss Christine Lagarde and EU Council President Herman van Rompuy met privately with Dallara through the night in a desperate attempt to convince the banking chief to break his stonewalling.

And ultimately, according to German Chancellor Angela Merkel, the EU leaders prevailed in pushing up the contribution of the banks.

“We actually at our level only made one offer. The representatives of the banks took it back to other banks,” she told reporters. “This was our last offer. In the end we got their approval."

Asked whether the EU leaders ever threatened the banks with an imposed haircut, which would have entailed a hard Greek default, she replied: “Since an offer was made, we never hit that point, but clear a voluntary contribution was preferred so we didn't need to think about the other option.”

Van Rompuy also announced that eurozone leaders had agreed a plan to leverage the area’s rescue fund, the European Financial Stability Facility (EFSF), to build a “firewall” of some €1 trillion, although technical details of the plan will not be decided for perhaps another month.

The EFSF will now insure against first losses on the issuance of fresh sovereign debt at a level of somewhere between 20 and 30 percent while at the same time establish a number of ‘special purpose investment vehicles’, or Spivs, which hopes to attract investment from sovereign wealth funds in China and other emerging economies, and will also involve additional participation of the International Monetary Fund.

Both aspects of the reinforcement of the EFSF will “multiply up to five-fold the firepower of the EFSF,” he said, “depending on market conditions, the set-up and investors’ responsiveness in view of economic policies.”

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Negotiations between EU leaders and representatives of the global banking industry over the scale of losses the financial institutions are willing to take on Greek debt have all but broken down.

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Banks, Europe haggle over scale of bond haircut

The world’s banks have delivered a “significant” new offer on the scale of a haircut on their holdings of Greek sovereign debt, but no details have appeared since their earlier stance described by one EU diplomat as “playing hardball”.

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A lobby for the world's biggest banks - the International Institute of Finance - became a key EU player when it negotiated the debt cut on Greece's second bailout. Its world of rented castles and sopranos shows losses were bearable.

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