Berlin dampens EU summit hopes as banks fight Greek write-downs

Financial markets have risen in the last week on hopes that the 27 European Union leaders will agree on a comprehensive plan to draw a line under the 2-year-old crisis.

But German Finance Minister Wolfgang Schaeuble said in Duesseldorf on Monday that while European governments would adopt a five-point platform to address the turmoil, it was wrong to expect miracle cure from the summit.

“We won't have a definitive solution this weekend,” he said.

Schaeuble said the plan would have to include a reduction in Greece's debt mountain. He repeated at the weekend that private bondholders would have to accept steeper voluntary write-downs on their Greek holdings than the 21 percent agreed last July.

A lead negotiator for the banks said this could only happen if policymakers addressed the “full range” of sovereign debt issues in Europe. Charles Dallara of the Institute of International Finance (IIF) declined comment on reports that the private sector might have to take a 50-percent loss.

Eurozone leaders are in a race against time to convince banks to accept “voluntary” write-downs of up to 50 percent on their Greek debt. They are also trying to agree on a blueprint for recapitalizing financial institutions at risk from the deepening crisis.

Banks Push Back

Dallara, managing director of the IIF, told Reuters that private holders of Greek bonds were prepared to discuss changes in how they might participate in future Greek debt relief.

EU officials say the bankers have little choice, since the alternative would be a disorderly default that would trigger wider financial market chaos and bigger losses.

But in a sign of growing frustration with policymakers, who have changed their crisis strategy repeatedly as Greece's woes have deepened, Dallara said a broader discussion was needed.

Privately, bankers say addressing Greece's woes alone will accomplish little. They are pushing policymakers to come up with a stronger plan for addressing the woes of the entire eurozone.

One solution under discussion is leveraging the EFSF to give it more firepower. Greece's overall debt mountain is forecast to climb to 357 billion euros this year, or 162 percent of annual economic output — a level economists agree is unsustainable.

How to recapitalize banks is another source of conflict. The European Banking Authority (EBA), which is assessing bank capital needs, is expected to mark down the value of their sovereign debt holdings and require a 9-percent core Tier 1 capital ratio.

This would force banks to raise billions of euros. Leading German and French banks have said they will resist forced recapitalizations, but the French government made clear on Monday that this is what policymakers wanted.

“French banks will be recapitalized even though they are solid because we are in a climate of extreme nervousness, extreme tension and lack of confidence so we must strengthen all the banks,” French government spokeswoman Valerie Pecresse said on French radio

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