European rescue package truth and fallacy


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Numbers announced by European leaders concerning the private sector participation to the rescue do not add up: the total losses would amount to EUR55 bn, far from the EUR100 bn trumpeted.

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European rescue package truth and fallacy

  1. 1. European rescue package: truth and fallacy 07 November 2011It occurred to me that the EUR100 bn private sector participation to the latest Greekrescue might no be as large as trumpeted by European leaders on 26th October.The statement:“…we invite Greece, private investors and all parties concerned to develop a voluntarybond exchange with a nominal discount of 50% on notional Greek debt held by privateinvestors.”The facts:1. Greek’s sovereign debt holders split: • Commercial banks: EUR81 bn • ECB: EUR45 bn • EU/IMF: EUR65 bn • Others (SWFs, asset managers, central banks, public sector funds): EUR159 bn2. As per EBA data published in July stress test, Greek banks shared 59% of the total heldby commercial banks, i.e. EUR48 bn. The reduction in Greek debt will be at least partlycompensated by a bank recapitalization (I estimate it at around EUR30 bn – same as theEBA): the net effect on the Geek sovereign debt reduction is therefore rather minimal atapproximately EUR18 bn (assuming that Greece and not the EFSF recapitalizes).3. According to a research published by Barclay’s Bank in July, EUR11.3 bn are held by EZInsurance companies: 50% is EUR5.7 bn4. Non-Greek European banks will take a EUR16.5 bn loss.5. Remains private assets managers and smaller holders of Greek bonds which I believeare not significant: say EUR 30bn to be generous or a EUR15 bn loss.The total losses realized by the private sector would therefore amount to EUR55 bn, farfrom the EUR100 bn trumpeted. 1
  2. 2. non-Greek European private sector banks would write-down +/- EUR16.5 bn, one maywonder why the EBA requires them to raise EUR76 bn whilst they are profitable enough(but for a few exceptions) to absorb losses on Greece and reach the 9.5% Basle III capitalrequirements.Because, there is more to come; then EUR106 bn will not be enough; watch non-performing private sector loans in Greece and elsewhere as well as Italy, France, Portugal,Belgium, etc. sovereign debt… Italy’s interest rates on its debt are close to unsustainable at6.6% and France together with Belgium are rapidly going the same way: any 1% increasetranslates into +/- EUR19 bn additional interest payment in a full year for Italy and EUR17bn for France.The EUR1 tr EFSF will not be enough, nor the EUR200 bn recapitalization recommendedby the IMF: the only remaining solution would be for the ECB to monetize sovereign debtfor BIGSPIF. Germany has already started to eat its hat; when enough will be enough forGermans?…BIGSPIF: Belgium, Ireland, Greece, Spain, Portugal, Italy, France.Source:European Banking Authority: The EBA details the EU measures to restore confidence inthe banking sector Institute of International Finance: Press Statement on Euro Area StablizationMeasures Commission: Euro Summit Statement 2