Germany’s economic elite has said it would agree to an EFSF expansion and hence installation of European firewall, but at a price: a “controlled” default by Greece and 50% haircuts for private bondholders (good for German banks who have already offloaded their Greek bonds).
This means that a second “Lehman” moment is indeed here!
So as part of this new strategy, here are the three key components of the plan to “firewall” contagion, via the Telegraph.
Sources said the plan would have to be released as a whole, as the elements would not work in isolation.
First, Europe’s banks would have to be recapitalised with many tens
of billions of euros to reassure markets that a Greek or Portuguese
default would not precipitate a systemic financial crisis. The
recapitalisation plan would go much further than the €2.5bn (£2.2bn)
required by regulators following the European bank stress tests in July
and crucially would include the under-pressure French lenders.
Officials are confident that some banks could raise the funds
privately, but if they are unable they would either be recapitalised by
the state or by the European Financial Stability Facility (EFSF) – the
eurozone’s €440bn bail-out scheme.
The second leg of the plan is to bolster the EFSF. Economists have
estimated it would need about Eu2 trillion of firepower to meet Italy
and Spain’s financing needs in the event that the two countries were
shut out of the markets. Officials are working on a way to leverage the
EFSF through the European Central Bank to reach the target.
The complex deal would see the EFSF provide a loss-bearing “equity”
tranche of any bail-out fund and the ECB the rest in protected “debt”.
If the EFSF bore the first 20pc of any loss, the fund’s warchest would
effectively be bolstered to Eu2 trillion. If the EFSF bore the first
40pc of any loss, the fund would be able to deploy Eu1 trillion.
Using leverage in this way would allow governments substantially to
increase the resources available to the EFSF without having to go back
to national parliaments for approval, which in a number of eurozone
countries would prove highly problematic.
The arrangement is similar to the proposal made by US Treasury
Secretary Tim Geithner to the eurozone at the September 16 EcoFin
meeting in Poland. Gathering turmoil in financial markets has convinced
Germany to begin work of some kind of variant of the US plan, despite
having initially rejected the notion as unworkable as threatening to
compromise ECB independence.
The proposal would be hugely sensitive in Germany as its parliament has yet to ratify the July 21 agreement to allow the EFSF to inject capital into banks and buy the sovereign debt of countries not under a European Union and International Monetary Fund restructuring programme. The vote is due on September 29.
As quid pro quo for an enhanced bail-out, the Germans are understood to be demanding a managed default by Greece but for the country to remain within the eurozone. Under the plan, private sector creditors would bear a loss of as much as 50pc – more than double the 21pc proposal currently on the table. A new bail-out programme would then be devised for Greece.
And just minutes after my last post wondering when to let Greece go, Sky News is anticipating the EU make up their minds in letting Greece default after October.
More from Sky News correspondent Ed Conway (via Twitter):
- G20 now preparing itself for Greek default after October – Sky sources. Will be on Sky News imminently with more
- G20 sources: all efforts behind the scenes (by G20 members)
are now going into recapitalising banks, preparing economies for
- G20 sources: default not expected until after Cannes G20
early November. Emergency funding should still keep Greece afloat thru
- G20 sources: No suggestion Greek default need imply country leaving the euro
- G20 sources: @ Washington summit marked difference in
attitude. Confident euro members edging closer to recapitalising banks,
Finally, Greece default is no longer a taboo, but in the last days it has been finally given real consideration with plans being devised to try and make it as soft as possible.
Europe should have let Greece default 1 years ago and it would have been much less costly to the EU and maybe would have prevented a Domino effect. The reality now is that Europe needs to
abandon the existing perimeter and fall back to a more defensible
position. Europe doesn’t need to collapse, but it does need to retreat
to a core, stronger position, where it can dig in its heels and defend
itself, how deep the retreat will be is going to be defined by events in the following weeks.
Contagion was a concern back then in regards to Ireland and Portugal,
now it is a reality. Only the darkest of the doom and gloom crowd
believed that contagion could really spread to Spain and Italy, yet now we have reached that point.
Italy and Spain
are now trading almost where Portugal was a year ago before being bailed-out. Italy is the biggest loser in the recent turmoil and it is leading stock market losses with an incredible -33%. How much easier
would it have been for Italy to withstand a Greek default when it’s 5
year bonds were trading at Bunds + 134 instead of Bunds + 407.
Let’s just admit it is
gangrene and that it has already spread farther than is safe, but it is
still better to cut off an arm to save the body. If we keep waiting it
may not be possible to save the patient. The patient is getting weaker
by the day, and being blind to that is just as big and just as dangerous
as letting Greece default now.