Answers for an Ongoing Crisis

In the ongoing battle against the euro zone debt crisis, policy makers have been continually engaging in frequent meetings to formulate solutions in order to desolve the crisis amidst the threat of an imminent Greek default. The European Central Bank President Jean-Claude Trichet issued a warning depicting the gravity of the situation, “the crisis is systemic and must be tackled decisively.” Despite the display of solidarity and an indication of support from the European Central Bank, interbank lending rates within Europe depicted a continuous rise amidst growing concern over European banks’ ability to handle the debt crisis. Three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending, rose to 1.570 per cent from 1.567 per cent.

Germany and France have promised to propose a comprehensive strategy to fight the debt crisis at an EU summit delayed until October 23. The two nations currently differ and need to resolve differences over how to recapitalise banks; whether to force a Greek debt restructuring or stick to a voluntary deal with private bondholders on how to use the euro zone’s rescue fund. Jose Manuel Barroso, president of the EC, told the European Parliament that the EU needed “compatibility” if the crisis is to be resolved. “How can we speak about co-ordination and integration in a disintegrated manner?” he said on Wednesday. “It is obvious that we need a community approach.”

German banks are bracing for losses as high as sixty percent on their Greek government debt holdings as European officials push for more private-investor involvement in rescue of the debt-stricken country. Greek ten-year government bonds are trading at about fourty percent of face value. Some German lenders have already written down Greek holdings to market levels, while lenders that booked smaller write downs may face further losses.

France is in favour of converting the euro zone’s bailout fund, known as the European Financial Stability Facility (EFSF), into a bank which could then acquire leveraging capacity. If this occurred, it would enable the bank to buy sovereign debt and pledge that as collateral to further borrow funds from the European Central Bank. Several other ideas have been put on the table by French officials including the provision of support of other European and international funds.

The European Banking Agency regulator is currently in the process of examining various financial institutions across the region in an attempt to recapitalise many of the affected institutions. The main purpose of the recapitalisation is to ensure that financial institutions are in a position to withstand losses in the event of a Greek default. According to analysts, Banks may be required to maintain a nine percent capital buffer to absorb sovereign risks, up from the five percent core capital level used in July’s stress tests. Eurozone officials say they will measure whether the banks can retain at least nine percent in high-quality reserves measured against their investments in bonds and other risky assets, even after losses on their holdings of government bonds. The nine percent standard would match that of a new set of rules called Basel III, which countries do not have to implement until 2019. In addition, European finance ministers are in process of devising a timeline for banks to strengthen their balance sheets under the Basel III framework. Germany opposes this as banks fear that the new set of capital requirements will become increasingly stringent and these measures will further jeopardise the stability of their banks.

October 23rd is currently viewed as a deadline for officials to lay out a plan to combat the crisis, which has placed Greece under imminent default, shaken world markets and undermined confidence throughout the globe including the stability of the Euro. To regain immediate assistance, Greece should take into account the possibility of private investor funding from outside the euro zone. Japan has indicated such an interest on the condition that a fundamentally sound plan is drafted and implemented within the region.

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