Britannia Radio

From The Times

May 1, 2010

Germany orders bankers 

to share Greek pain

Carl Mortished, World Business Editor

Germany’s top banker Josef Ackermann has been asked to orchestrate a private sector contribution to the Greek bailout.

The chief of Deutsche Bank has been asked by Wolfgang Schäuble, the German Finance Minister, to co-ordinate a response after complaints by German opposition politicians that banks and bond holders were not sharing the pain of a Greek rescue with taxpayers.

Eurozone governments were yesterday waiting for a signal from Athens that a deal had been completed between the Greek Government, the European Central Bank (ECB) and the International Monetary Fund that would unlock up to €120 billion (£104 billion) of rescue finance.

Greece must redeem €8.5 billion of government bonds by May 19, but a loss of confidence in the country’s ability to pay has left it shut out of the bond markets.

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Pressure continued to mount on Greece yesterday when Moody’s, a leading debt rating agency, downgraded nine of its banks, including National Bank of Greece, because of their “weakening stand-alone strength” due to challenging economic prospects, low business growth and increased loan quality problems.

Increasing discontent over the role of rating agencies in Greece’s troubles came to a head yesterday when a board member of the ECB said that Standard & Poor’s (S&P) had been too quick to downgrade the country’s credit rating to “junk” on Tuesday.

Ewald Nowotny, the governor of Austria’s central bank, said that it was “very problematic that S&P changed its ratings for Greece while negotiations about the measures were still going on”.

Talks continued yesterday in Athens over the details of an austerity package — a promise to implement a new budget of spending reductions and tax increases aimed at cutting €24 billion from Greece’s deficit.

The deal is expected to be announced this weekend by George Papandreou, the Greek Prime Minister. A meeting of the eurozone finance ministers will be held in Brussels tomorrow. Luxembourg’s Jean-Claude Juncker, head of the finance ministers, described the session as “an extraordinary meeting”.

The acceptance of the austerity package by the ministers will trigger national action, most notably a Bill in the German Parliament to authorise the rescue loans.

Germany, the biggest contributor to the eurozone rescue package, has been a stumbling block because of public opposition to the use of taxpayers’ money to rescue a foreign government.

Germany’s Socialists, the main opposition party to Angela Merkel’s coalition Government, called this week for banks to share the pain of a rescue and urged the Government to work towards a financial market tax or levy on the banks across Europe.

Without the consent of the Socialist opposition to a fast-track legislative procedure, the Greek rescue Bill could be mired in weeks or months of debate in Parliament.

Guido Westerwelle, Germany’s Vice-Chancellor, said that he expected private sector support: “I expect that, just as in Germany banks will participate in the consequence of the economic and financial crisis through the famous bank levy . . . so also in Europe banks will want to make their contribution [to Greece], and will do so.”

A bank participation in the bailout could come in the form of a pledge to subscribe to a Greek bond issue of between €1 billion and €2 billion.

In its downgrading of the Greek banks, Moody’s pointed to their increasing reliance on ECB funding, which represents 15 per cent of the total liabilities of Greek banks.

The ECB recently relaxed its rules to allow banks to pledge Greek government bonds as collateral for loans, despite the continuing fall in the sovereign credit rating.

Mr Papandreou last night urged his country to accept unpopular spending cuts. He said that the nation’s survival was at stake as the Government closed in on a international debt bailout.

“Today, what is most important is the survival of the nation, that is our red line,” he told Parliament.

“The measures which we must take . . . are necessary for the protection of our country, for our survival, for our future.”

Potential impact on UK

• British banks hold only 4 per cent of the world’s outstanding Greek government bonds, so will not fear a repeat of the Dubai tremors if Greece collapses

• French banks face greatest danger from a Greek financial collapse because they have a quarter of the world’s exposure. Switzerland has 21 per cent and Germany has 14 per cent

• Portugal being drawn into the issue would not worsen the position for British banks which, according to Credit Suisse, have only £25 billion of combined exposure to Greece and Portugal

• Spain poses a greater potential threat with the UK’s exposure there at £75 billion

• The state-backed UK banks look safe. Credit Suisse estimates that Lloyds bank’s exposure to the Greece, Portugal and Spain is negligible, although RBS has about £35 billion of outstanding loans, predominantly against Spain. It has loans of between £3 billion and £4 billion to Greece and Portugal combined

• Barclays has £40 billion of exposure, predominantly in Spain and Portugal

• British banks may even benefit from the Greek problem spreading across Europe. Credit Suisse said in a note that an “increase in volatility should assist revenues at the investment banks particularly for primary dealers

• If the UK were to be dragged into the problem because of its huge debt, pressure could mount on the Government to sell its stakes in banks more quickly to help manage the deficit (Helen Power)