Bloomberg News

Compulsory Greek Debt Writedowns to Cost Taxpayers $55 Billion

October 25, 2011

Oct. 25 (Bloomberg) -- Taxpayers in the euro region may face losses of as much as 40 billion euros ($55 billion) should banks be forced to take writedowns on Greek bonds.

The 47 billion euros of bilateral loans Greece has received from the region’s governments have the same level of seniority as the nation’s bonds, according to Evolution Securities Ltd. in London. That means losses inflicted on bondholders must be imposed on the loans as well as notes bought by the European Central Bank under its 165 billion-euro Securities Market Program if a non-voluntary restructuring takes place.

“The bilateral loans have got to be the worst bit of lending in history,” said Gary Jenkins, head of fixed income at Evolution in London. “That’s why they don’t want to see a loss. It’s got to be incredibly embarrassing, one for the Guinness Book of Records for the worst lending decisions ever, to lose almost 40 billion euros of taxpayers’ money in 18 months.”

European leaders will hold their second summit in four days tomorrow as they scramble to agree on bolstering the region’s rescue fund, recapitalizing banks and saving Greece. Banks are pushing back against the size of losses they are ready to accept, increasing the prospect of a forced restructuring.

Electorates of the nations using the euro will be faced with losses of equivalent to 100 euros per man, woman and child, on loans their leaders agreed to if writedowns by the banks aren’t voluntary.

‘Tantamount to Default’

There are limits “to what could be considered as voluntary to the investor base and to broader market participants,” Charles Dallara, managing director of the Institute of International Finance, an industry group that’s participating in the talks on Greek debt, said yesterday. “Any approach that is not based on cooperative discussions and involves unilateral actions would be tantamount to default.”

The euro nations would have to make good losses on the ECB’s Greek bonds, as well as write off 50 percent of their bilateral loans, according to Jenkins. The European Union is now recommending that an overdue 5.8 billion-euro portion of the loan program, due on Sept. 30 under the bailout and held over, should be paid.

While the ECB doesn’t break down its bond purchases by issuer, it probably bought about 40 billion euros of Greek debt, according to Evolution. Analysts including Laurent Fransolet at Barclays Capital in London put spending on Greek bonds at as much as 50 billion euros, meaning the potential loss is higher.

Assuming the ECB bought bonds at an average discount of 20 percent, it has spent about 40 billion euros to buy 50 billion euros of Greek bonds.

50% Writedown

A 50 percent writedown would leave the central bank holding 25 billion euros of bonds that cost it 40 billion euros, a loss of 15 billion euros. The 47 billion euros of loans already disbursed would be cut by half, for a loss of 23.55 billion euros, a total cost of 38.55 billion euros, assuming the overdue 5.8 billion loan portion isn’t disbursed before the restructuring.

The population of the euro area is 402.8 million, data compiled by Bloomberg show, adding up to a loss of 96 euros per head and helping explain why European leaders oppose anything that triggers credit-default swaps, according to Jenkins at Evolution.

European leaders including ECB President Jean Clause Trichet, object to any action that trips a payout of swaps, which would happen in anything other than a voluntary writedown. Contracts outstanding on Greece fell 42 percent this year to $3.7 billion, according to the Depository Trust & Clearing Corp., a fraction of the 280 billion euros of bonds the nation has out, Bloomberg data show.

“They’re going to have to have a proper writedown,” said Kevin Gaynor, head of macro strategy at Nomura International Plc in London. “They’re going to have to accept that CDS will be triggered and all that goes with that.”

--Editors: Michael Shanahan, Paul Armstrong

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net


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