ATHENS — Like their colleagues across Europe, bankers in Greece invested heavily in their own government’s bonds, open to what they considered low-risk investments that helped their country.
Now they are about to pay for it.
European leaders have crafted a plan to solve their debt crisis by having banks take bigger losses. Markets were cheering the news Thursday. (Oct. 27)
Greek banks still facing hot water
Europe puts brakes on Greece’s aid
A plan being developed to help reduce Greece’s debts — and prevent it from becoming the first euro-zone country to default on its debts — will fall hardest on the country’s banks and the national pension system. They would face tens of billions of dollars in losses on investments in Greek government bonds.
According to data from the European Banking Authority, major Greek banks hold about $70 billion in Greek bonds, more than one-fourth of the total held by private investors worldwide. Greece’s national pension system has about $30 billion at risk, according to local bank and corporate officials.
Even as Greece benefits from emergency debt relief included in the new bailout plan approved by European leaders last week, the Greek government will have to borrow even more money to shore up its financial system and replenish the pension fund. Greek bankers say they doubt they could come up with the money on their own.
“Could we raise 25 billion euros? It is a small chance,” said Gikas Hardouvelis, chief economist for Eurobank EFG in Athens.
Instead, the rescue plan being developed by European officials and the International Monetary Fund sets aside cash to rebuild the financial system.
Two years into Greece’s crisis, the latest challenges facing the government and the banks show how little progress has been made by a series of international rescue efforts.
The Greek government has undertaken extensive, often painful, reforms and it has been lent tens of billions of dollars by the IMF and Greece’s euro-zone neighbors. But after all that, the country’s debt level as of 2014 is projected to be no less than what the IMF forecast in 2009.
To help bring down Greece’s debt, European leaders are negotiating with banks and other bondholders in a variety of countries to secure a 50 percent cut in the value of privately held Greek debt.
The debt reduction “gives us more than a fighting chance. It was a necessary condition, but by no means sufficient,” said former Greek finance chief George Papaconstantinou, now the country’s energy minister. “If we don’t continue reforms and growth does not come back, we have not done much.”
Despite the optimism of officials such as Papaconstantinou, the announcement last week that bondholders would be asked to take a 50 percent loss met with mixed reaction in the country. The deal would free Greece from paying about $120 billion currently owed to private investors, but it may come with strings attached.
The new rescue program being crafted for Greece by the IMF reflects more pessimistic assumptions than a program put together for the country in May 2010. They include slower projected economic growth and slower progress toward a balanced budget.
The new program implies years of dependence for Greece on financing from the IMF and the rest of Europe. Monitoring teams from other European countries will take up permanent residence in Athens to help restructure the civil service and the economy — with some Greeks worried about a loss of sovereignty.
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