Good news for Ireland in latest discussions on Greek debt relief

Financial Crisis

Germany says Greek debt hit ‘unavoidable’

One of Angela Merkel’s key economic allies has opened the door to an
agreement on Greece’s debt crisis by saying it is “unavoidable” that
investors in the country’s ballooning debt will have to forfeit some
repayments and interest.

By Amanda Andrews

9:38PM BST 16 Jul 2011

Wolfgang Franz, the head of the German Chancellor’s council of
economic advisers, said investors could swap Greek debt for discounted
bonds issued and guaranteed by the European Financial Stability

It has also emerged that a Greek bond buyback financed by the European
Financial Stability Facility could help reduce the country’s debt by
€20bn (£17.5bn), Der Spiegel reported, citing calculations by the
German finance ministry. The buyback is “one of a number of
alternatives” that are being tested on behalf of finance minister
Wolfgang Schaeuble, the magazine said

In an interview with the German magazine Focus, Mr Franz said banks
and insurers would get AAA-rated securities in exchange for their
Greek holdings and that the European Union would have to discuss
making the same offer to Portugal and Ireland.

His comments come as European leaders are set to gather on Thursday
for an emergency summit on Greece, as they try to resolve the
worsening debt crisis threatening more eurozone countries.

European Council president Herman Van Rompuy has called the meeting in
an attempt to prevent contagion from the debt crisis spreading to
Italy and Spain.

Last week, five Spanish banks were among eight institutions to fail a
new stress test on European banks that revealed a total capital
shortfall of approximately €2.5bn. This figure was considerably lower
than the estimates of many investors and led to criticisms that the
tests were not vigorous enough.

Lack of clarity about how Europe plans to tackle the risk that
countries such as Greece will default under a huge debt burden has
sent bond yields soaring, dramatically raising the cost for banks when
issuing new bonds.

The drop in bond values also means banks may need to write down any
portfolios of sovereign bonds they hold. Bank shares have been losing
ground as a result.

It is understood that depositor funding – from clients who put their
money in a current or a savings account – is also under pressure, with
withdrawals seen in countries such as Ireland and Greece and a fight
for depositors’ cash in Spain and elsewhere squeezing margins. Other
funding channels – such as the covered bond market, commercial paper,
or asset-backed securities – are also starting to look increasingly

European finance ministers have acknowledged that some form of Greek
default may be needed to cut Athens’ debt, but investors fear that
could ripple through Europe’s banking system.

The European bank share index has lost roughly 10pc since the
beginning of the month as bankers and politicians frantically work on
a plan to provide more support to Greece without triggering a default.

European banks have raised about €43bn since their resilience against
an economic downturn was tested last year, and this year will show the
need for more.