Europe Zone to Seek External Funding to Leverage EFSF

Bikram Pandey
23 Oct, 2011
New York City

European leaders discuss the fate of Greek bonds and appear to increase losses for private banks to as high as 60%. Banks are likely to increase tier 1 capital to 9% and raise more capital from their investors before approaching national governments. Greece may need more bailout capital.

[R]4:05 PM Frankfurt – European leaders discuss the fate of Greek bonds and appear to increase losses for private banks to as high as 60%. Banks are likely to increase tier 1 capital to 9% and raise more capital from their investors before approaching national governments. Greece may need more capital before the economy recovers.[/R]

Facing a deadline this Wednesday, European leaders appear to make a progress on Greek debt crisis, bank recapitalization plan and how to leverage the rescue fund.

The two days of meetings that began yesterday in Brussels have kept the city buzzing with officials from 27 nations, European Central Bank and the International Monetary Fund.

Leaders of 27-member nations of the European Union began their two-hour meeting scheduled at 3 pm and are expected to continue with more discussions with the euro zone 17 member nations later today.

The preliminary discussions of the leaders suggested that the private banks will be asked to accept losses in Greek bonds as high as 60%, significantly higher than the 21% agreed in July.

The decision on the Greek bonds is a crucial because it will also determine the size of bank recapitalization plan and the amount of capital banks will need.

Greece has received nearly €256 billion of bailout funds from the European institutions and the International Monetary Fund. However, Greek Finance Minister Evangelos Venizelos noted before the meeting that the Greek economic situation has worsened in the last two years.

Greek Prime Minister George Papandreou said today, “That the crisis is not Greek crisis and is a European crisis. Now is the time that we as Europeans need to act decisively and effectively.”

The EU officials estimated that if Greek economy does not recover in the next two years then Greece may need €460 billion of bailout by 2020.

How the European leaders decided to deal with the Greek bonds crisis will also set the tone for the bank recapitalization plan.

EU officials in several independent conversations with 123jump.com and Ticker.com representatives suggested that banks will be asked to increase their tier 1 capital ratio to 9% as early as January and will be asked to raise capital of at least €105 billion from investors.

The national governments will intervene as a last resort but investors will be asked to contribute first.
Jean Claude Juncker of Luxembourg, the head of the euro group finance ministers said, We have agreed yesterday that we have to have a significant increase in the bank’s contribution.”

The leaders are still at odd in how to increase the size of the rescue fund known as the European Financial Stability Facility.

French Prime Minister Nicolas Sarkozy appear to back away from the plan of turning the EFSF into a bank licensed by the European Central Bank and will be able to borrow funds.

Germany, Holland and Sweden are opposed to such a plan and several smaller member nations have also raised their reservations.

The plan that is in favor now is to turn the EFSF into an agency that offers insurance to the European bonds issued by the member nations and will cover no more than 30% of the funds raised. And, the insured facility will attract sovereign funds of other nations to provide more capital.

In short, the plan is to attract other sovereign funds from Asia and Middle East to participate in the fund and leverage their capital and build on the credibility of the European institution.

The European Central Bank officials were vocal about their inability to purchase any more bonds of the troubled European nations like Spain, Italy and others.

The ECB has purchased so far close to €157 billion of bonds and continue to support the new issues of bonds from Spain and Italy but the purchases have slowed and the yields on the bonds have risen.

The ECB officials are also worried about the fate of the bonds purchased with no clear direction as how it will be able to recover the investments.