EuroZone finance ministers put off Greek vote and talk of reopening July Greek rescue deal
10/04/2011 12:39 pm EST
EuroZone finance ministers meeting in Luxembourg are thinking about reopening the July deal that would have provided a second rescue package for Greece. (The first package, which envisioned Greece being able to return to the financial markets to sell bonds in 2012, is now, to use the famous phrase of Ron Ziegler in 1973, “inoperative.")
That deal sought to reduce the Greek debt load and to give banks a way to move the worst of their Greek debt off their balance sheets by allowing banks to trade Greek debt for new bonds if they signed up for a write down of 21%. Now, the finance ministers indicate, that 21% haircut seems too low and banks and other bondholders may be asked to take a bigger loss. “We have to recalculate what that will actually cost and how to deal with it,” Austrian Finance Minister Maria Fekter told reporters.
Just two teeny, tiny problems with that kind of talk coming out this meeting today.
First, what the financial markets want to hear is news that the next $11 billion payment to Greece from the International Monetary Fund, the European Union, and the European Central Bank has been approved—and not talk about the need to reopen the July agreement. Greece has said that it will run out of money to pay government salaries and pensions by October 10. Some EuroZone finance ministers have pooh-poohed that deadline saying that Greece can find the cash to keep the doors open through the end of October. (Feel relieved? Note that Greece needs the cash to keep the country’s doors open. The country doesn’t face a big risk of missing a payment to bond holders until December.)
In other words, the financial markets would like some certainty and not more uncertainty. Instead finance ministers pushed back a decision on the next rescue payout until after October 13.
Second, with French-Belgian bank Dexia looking like it will need a second bailout, this isn’t exactly a great time to be talking about 50% haircuts replacing 21% trims. The talk is particularly damaging to banks such as Dexia and France’s BNP Paribas and Societe Generale that have resisted pressure from regulators to cut the value of the Greek debt that they hold in their portfolios to market prices (a discount to face value of 50% or more) and have instead used the July agreement to justify writing down their portfolios of Greek debt by just 21%. Removing that accounting prop and requiring a bigger markdown could send French banks too looking for government support.
Or at least that’s what the market feels—legitimately—today.
The only good news I can see—if you’re the glass isn’t ¾ empty, it’s ¼ full type—is that EuroZone leaders are handling this so ineptly that even the shoddiest deal, when and if they pull it together, will feel like a huge relief.