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A new tax imposed on European banks to save Greece

18 July 2011 / 16:07:45  GRReporter
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There are talks in Brussels about new bank taxes, which will ensure the participation of private investors in the rescue of Greece, reports the German edition of Die Welt. The additional tax will be imposed on all European banks, even on those not connected with the Greek foreign debt and not holding Greek government bonds. It will become clear whether this scenario will come into force during an emergency summit which will take place in Brussels the coming Thursday. The additional tax will accumulate about one billion Euros per year. The ultimate goal is this auxiliary fund to raise around 70 billion Euros to be used as a guarantee or in some other form, when a EU country is threatened by failure. The expected outcome is at the summit the European leaders to reach consensus on the final version of the plan for solving the Greek crisis issue.

The President of the European Union Herman Van Rompuy would not convene an extraordinary meeting, if the final solution for emerging from the crisis were not ready, familiar comment. However, the frameworks of the new conditions for solving the Greek issue are not fully known. There are not many options before the EU leaders because the Greek foreign debt is uncontrollably high, and the payments on it are excessive. At the same time, the decision taken for Greece will prejudge future actions to manage such crises in other European countries that have greater importance for Europe's financial stability, such as Spain and Italy.

For now, the idea of ​​re-purchasing the Greek government bonds at maturity in 70% of their nominal value remains on the table of negotiations. The exchange of maturing Greek government bonds for other of 25% -30% lower value and longer maturity is a decision that the German insurance giant Allianz supports. "In fact, this would lead to an increase in the term of the debt and to a reduction in its value by 30 percent at the same time," says the director of the company Paul Atslider to the German edition of Financial Times.
The exchange of the bonds for such of a lower value and longer maturity period is recognized as a kind of haircut of the foreign debt and has its opponents. The markets and financiers could perceive a similar action as debt restructuring and it could cause a credit event and even trigger the CDS market for external insurance lending.

The President of the European Central Bank President Jean-Claude Trichet warned that if it comes to a partial or complete default on Greece’s foreign debt of, the bank would no longer accept Greek government bonds. "Governments are fully responsible for the consequences," he said, adding that the government should find other types of guarantees that are acceptable to the Bank. Currently, the European Central Bank is the only financial institution that accepts the Greek bonds of the local banks and it is their only source of funding.

Trichet is adamant that he would not risk the position of the European Central Bank, which is the "anchor of financial stability" in the Union, and to continue to accept government securities of a country in default, whether it is selective or not. Greece is a breath away of this assessment, since the three international credit rating agencies warned that they would downgrade it to selective default if private investors take part "voluntarily" in the rescheduling of accounts receivable on bonds maturing in the next few years.

The German banker Iens Vattman also opposed the restructuring of the Greek foreign debt and the issuance of Eurobonds to be used for cheaper funding of the countries from the Union. In his opinion, the debt restructuring will not solve the problems of the country. "Greece is spending significantly more than it is producing and therefore supports this apparently high budget deficit," said the banker to Bild magazine. He made it clear that until these imbalances do not change, no haircut would improve the situation.

The German Chancellor Angela Merkel is on the informal side concerning the issue of the Greek selective default. She speaks out against any restructuring of the debt of Greece, although she does not exclude it. "I will travel to Brussels only if there is a final decision on the Greek issue. There is an urgent need for a final solution," said Angela Merkel before the TV channel ARD, quoted by Naftembotiki. Meanwhile, the German government decided to reduce the taxes on the banks’ profits in the autumn. This will provide funds for the establishment of an internal support fund for the rescue of local financial institutions in future crises. Obviously, Merkel is not optimistic as far as the European finances are concerned and she is willing to provide additional funds in order to be prepared if there is a more serious crisis.

Merkel herself has proposed several months ago private investors to take part voluntarily in the rescue plan for Greece. "We are not working on the restructuring plan. We are doing anything to prevent something that would be more severe than the previous measures. It is clear that the idea of ​​involving private investors revealed that there is a specific problem in Greece due to the high foreign debt. "

The last harbour of hope appears to be the European Financial Stability Facility (EFSF which is to buy Greek government bonds at a lower than the nominal value from the secondary financial markets. Probably this would not save the country from the so-called selective default, but the European Central Bank would not fill its pockets with devalued government securities. The economist Beatrice Veder di Mauro and adviser to the German Government supports this idea. She offers the European Financial Stability Facility to buy the securities from the Greek market at a price 50% lower than the initial and then to exchange them for a new package of Greek bonds, which the European Central Bank would accept.

Tags: EconomyMarketsSelective defaultGreeceCredit rating agenciesGermanyECBGovernment bonds
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