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Policymakers tell Reuters European Central Bank may take 30% losses in second Greek debt restructuring.
27 July 2012, 12:00am
Malta could be forced to take significant losses on bond holdings with Greece, as European policymakers were reported to be working on "last chance" options to bring Greece's debts down and keep it in the eurozone.
Reuters reported that after private creditors and banks took big writedowns on their Greek bonds after the second bailout was issued to the beleaguered EU member states in February, now European central banks are expected to take losses on their holdings of Greek bonds - which means national governments accepting the losses.
Policymakers who spoke to the news agency said the latest aim is to reduce Greece's debts by a further €70-100 billion, so that Greek debt can come down to a manageable 100% of its gross domestic product.
"The favoured option is for the European Central Bank and national central banks to carry the cost, but that could mean that some banks and the ECB itself having to be recapitalised," Reuters quoted unnamed officials saying.
The ECB declined comment.
Two officials indicated that the French, Maltese and Cypriot central banks were most exposed to Greek government debt and would probably need a capital injection. Two other officials said the ECB could also need balance sheet support.
But Finance Minister Tonio Fenech lambasted the Reuters report that claimed Malta's central bank would have to be recapitalised in the case of a haircut.
"It is completely wrong and highly speculative. The Maltese government does not anticipate such a situation to happen, but even if things had to come to their worst, the CB's exposure to Greek bonds is minimal and the losses could be easily absorbed by the Central Bank's profits of just one financial year."
Fenech underlined the fact that Malta's exposure to Greek debt, in terms of governmnet-owned bonds, is quite low and minimal. Bonds are one aspect of the Greek debt, while guarantees pledged by EU member states are another.
In terms of its exposure to GDP, Malta is the EU's most exposed of member states to a possible Greek exit from the eurozone. Malta granted €56 million in bilateral loans to Greece and another €56 million was guaranteed in a second bailout through the European Financial Stability Facility. Japanese investment bank Nomura tagged Malta's total exposure as a percentage of its GDP at 4.3%, the highest of all EU states, followed by Estonia (4.2%), Slovenia (3.9%), and Slovakia (3.7%). The EU state with the lowest exposure is Luxembourg at 1.8% of its gross domestic product.
ECB officials believe cutting Greek debt by 120% of GDP by 2020 is not possible. One of the options is to write down the value of its government bonds held by central banks by 30% - a haircut, as it is termed.
The 30% haircut would amount to €70 billion.
Politically it may be easier for policymakers to get the ECB and national central banks to take a hit on their bond holdings, rather than eurozone governments which would mean that taxpayers suffered direct losses.
However, the process would still come with complications because it could mean that national central banks have to be recapitalised.
Total outstanding official-sector credits to Greece, which also includes bilateral loans extended to Greece by euro zone governments, is about €220-230 billion.
Graduated in anthropology, Matthew Vella joined MaltaToday in 2002. He has been ed...
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