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Eurozone to banks: take bigger loss on Greek debt
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The Associated Press
The eurozone's 17 finance ministers have agreed that banks must accept substantially bigger losses on their Greek bonds, and a new report suggests that writedowns of up to 60 per cent may be necessary.
The report from Greece's international debt inspectors, which was discussed at the finance ministers' meeting Friday, says in order to keep a second international bailout of Greece to the €109 billion ($150 billion U.S.) level tentatively agreed upon in July, Greece's debt would have to be cut 60 per cent.
Even that would leave the country's debts at 110 per cent of economic output in 2020.
"Yesterday we agreed that we need a substantial increase in the contribution from the banks," Jean-Claude Juncker, Luxembourg's prime minister who also chairs the meetings of eurozone finance ministers, said Saturday, following talks in Brussels.
That means the July deal, under which banks would have taken writedowns on their Greek bondholdings of about 21 per cent, is definitively off the table.
Austrian Finance Minister Maria Fekter told journalists that the eurozone's chief negotiator Vittorio Grilli had been asked to restart negotiations with banks.
The report did not make policy recommendations, and the European Central Bank opposes cutting Greece's debts further. But finance ministers are clearly paying close attention to the experts' document.
Another scenario showed that if Greece's debts are cut by only 50 per cent, the country would need an extra €114 billion ($157 billion) on top of the July package. All that comes in addition to Greece's first bailout of €110 billion ($152 billion), which has kept the country out of bankruptcy since May of last year.
The agreement to push for much bigger losses is a key step in helping Athens eventually dig out from underneath its debt burden.
Concerns about more turmoil in financial markets
But asking banks to more significantly write down their Greek debt will raise concerns about the ability of European banks' ability to withstand the losses — as well as the ensuing turmoil in financial markets that huge Greek writedowns would cause.
As a result, the finance chiefs from the 27 EU countries, meeting Saturday in Brussels, are also expected to force banks across the continent to raise billions in capital for their rainy-day funds.
Both measures are critical to solving Europe's debt crisis, which is now threatening to engulf larger economies like Italy and Spain and is blamed for dampening growth across Europe and even the world.
"The crisis in the eurozone is doing real damage to many of the European economies, including Britain," George Osborne, Britain's chancellor of the exchequer, said as he headed into Saturday's meeting. "We have had enough of short-term measures, sticking plasters that get us through the next few weeks."
European leaders had promised a solution would come from a summit on Sunday — following the two days of finance ministers' meetings — but they have now scheduled another get-together of EU leaders for Wednesday. Still, this weekend, European officials appeared to be making progress.
Pressure on finance ministers was high after the report from Greece's debt inspectors — the European Commission, the European Central Bank and the International Monetary Fund — showed that the country's economic situation had deteriorated dramatically even since the summer.
If banks don't take bigger losses, the report said, Greece's debt would peak at a massive 186 per cent of economic output in 2013 and only decline to 152 per cent by the end of 2020.
That would prevent Greece from raising money on the markets until 2021 and require the eurozone and the IMF to fund an extra €252 billion ($350 billion) in new loans to Greece through 2020, according to the report, which was marked confidential but was seen by The Associated Press.
While the ministers were making progress on reducing Greece's debts, an arguably bigger problem remained intractable: boosting the firepower of the eurozone's €440 billion ($600 billion) bailout fund to keep the crisis from spreading.
Increasing the effectiveness of the European Financial Stability Facility is meant to help prevent larger economies like Italy and Spain from being unable to afford to borrow money from markets — which is exactly what happened to Greece, Portugal and Ireland and why those countries needed bailouts.
But Germany and France still disagree over how to do that and failed to make much progress on that front Friday night. German Chancellor Angela Merkel and French President Nicolas Sarkozy are set to meet again Saturday evening in the hopes of moving toward a deal.
In a sign that the pressure is rising on leaders to come up with an overall solution, the eurozone finance ministers also said they'll regroup Saturday afternoon.
Greece is struggling through a third year of recession and record unemployment, which reached 16.5 per cent in July.
Greeks have faced a barrage of new taxes and job and pension cuts for over 20 months now, and deep anger is building against the Socialist government's repeated rounds of new austerity measures. A two-day general strike shut down much of the country this week, and Athens was rocked by two days of anti-austerity riots and clashes with police that left one person dead and over 200 injured.
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