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By Shavasb Bohdjalian
The forthcoming Summit on October 23 of the 27 EU leaders that is supposed to come up with a "comprehensive strategy" to tackle the sovereign debt crisis including a plan to recapitalize EU banks will probably also decide on the fate of Greece and whether or not the country is allowed to do a partial default on its debt and in the process force many Greek banks to seek government help.
EU leaders have been going back and forth for the last two years coming up with half measures which as British Prime Minister David Cameron appropriately said last week, were always "a bit too little, a bit too late", but it seems that we are approaching the end.
In July, with bond market contagion spreading for the first time to Italy, the euro zone's third biggest economy, leaders of the 17-nation single currency area agreed on a second bailout for Greece involving "voluntary" writedowns for private bondholders and more powers for their EUR 440 bln EFSF rescue fund, which is finally ready to act.
EU leaders realize that they also need to boost the capital of eurozone banks, which according to the IMF, may need as much as EUR200 bln in additional capital in order to shoulder a possible 50% writeoff of Greek debt.
The key elements in the latest "comprehensive strategy" are: reducing Greece's debt through a larger write-off; bolstering European bank capital to help them absorb losses; leveraging the rescue fund to prevent contagion to larger economies; and launching steps toward closer euro zone fiscal integration.
Policymakers are meanwhile facing stiff resistance from banks over plans for greater private sector participation in Greek debt restructuring and moves to force banks to raise capital.
Underscoring the difficult issues that negotiations must address, German Finance Minister Wolfgang Schaeuble told Reuters on Sunday that Greece's debt crisis could not be solved without larger write-downs on Greek debt.
In July, private creditors agreed to a voluntary write-down of 21% on their Greek debt, a figure which now looks insufficient. Euro zone officials said last week that losses are now likely to be between 30 and 50%.
The Chairman of Piraeus Bank, Michalis Salas however, poured cold water on the additional writeoff plan by clarifying that most of the hit would be on Greece banks, since the ECB and other European agencies are not participating in the debt reduction plan. According to Salas, the saving for Greece would amount to EUR 20-25 bln, but the plan would force most Greek banks to become nationalized as they would require billions in new capital.
With the Greek government not rushing to dismiss the comments from Salas, then if a larger writeoff plan is implemented, most Greek banks risk becoming nationalized, while other EU banks will rush to raise money from markets, private investors and if unable, tap local government and the EFSF.
As for the impact on markets, in most likelihood it will be muted since by the time the plan is announced and implemented, it will be widely known by everybody and hence there will be no panic.
The Greek default and EU bank recapitalization plan is not like the Lehman Brothers collapse which came unexpected and for which there was no rescue or reaction plan in place.
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(Shavasb Bohdjalian is an approved Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10. Eurivex is also a provider of forex white label solutions and forex brokerage packages. The views expressed above are personal and do not bind the company and are subject to change without notice. Investing in markets and trading on leverage is highly risky and it may not be suitable to all investors since it carries a high degree of risk and you can lose more than your initial investment)
