German Banks Said to Prepare for Up to 60% Loss on Greek Debt

By Aaron Kirchfeld, Oliver Suess and Nicholas Comfort – Oct 13, 2011

German banks are preparing for losses of as much as 60 percent on their Greek government debt holdings as European officials push for more private-investor involvement in a rescue of the debt-stricken country, said three people with knowledge of the matter.

The country’s banks held a conference call this week and participants discussed the potential for losses on Greek bonds of between 50 percent and 60 percent, though no final figure has been set, according to the people, who declined to be identified because the talks are private.

Deutsche Bank AG (DBK) Chief Executive Officer Josef Ackermann, who led talks in July when Europe’s banks and insurers agreed to a voluntary loss of about 21 percent, said he’ll go to Brussels next week to discuss the potential for a bigger reduction. Luxembourg’s Jean-Claude Juncker, who heads the group of euro- area finance ministers, said separately that talks are under way with the Washington-based Institute of International Finance, which Ackermann chairs, on the cost to investors of a second bailout package for Greece.

Greek 10-year government bonds are trading at about 40 percent of face value. Some German lenders have already written down Greek holdings to market levels, while lenders that booked smaller writedowns may face further losses, one person said.
Higher Capital Level

Increased private-sector involvement may be part of a larger European Union package aimed at stemming the spread of the sovereign debt crisis. An Oct. 23 summit of euro leaders looms as a deadline for a breakthrough in combating the crisis, which has driven Greece toward default, rattled world markets and dented confidence in the survival of the 17-nation currency.

European Commission President Jose Barroso called yesterday for a reinforcement of crisis-hit banks, the payout of a sixth loan to Greece and a faster start for a permanent rescue fund to ease Europe’s debt woes.

Banks may be required to maintain a 9 percent capital buffer to absorb sovereign risks, up from the 5 percent core capital level used in July’s stress tests, a person with knowledge of discussions at the European Union’s top banking regulator said yesterday.

European finance ministers are considering setting a new timetable for banks to strengthen their balance sheets under the Basel III framework, a French official said today. Asked if a 9 percent Tier 1 capital ratio, a key measure of financial strength, would be acceptable, the official said “yes.”

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