German banks could survive losses
Fitch warns against broader impact on system; Rehn says EU evaluating way to ‘reprofile’ debt
A top rating agency says Germany’s banks could survive losses on the Greek debt they hold if the country were to restructure its debts and pay less than the full amount owed, boosting arguments in support of a default by Athens.
But the agency is warning that a Greek restructuring could spread ripples throughout the banking system as a whole, making it harder to borrow at a time when many banks are still recovering from the financial crisis.
Fitch Ratings says
it does not foresee any ratings downgrade for German banks based on their exposure to Greece.
Even a severe loss of 50 percent on bond holdings would not deplete bank financial buffers to the extent that they would lose their current ratings.
Fears about what a Greek default or restructuring would do to the banking system have been a driving force behind EU efforts to prop Greece up with bailout loans.
Meanwhile, Pacific Investment Management Co’s head of Euro- pean credit portfolio management said Greece may manage to extend the maturities of its bonds without causing credit default swaps to pay out.
“Before you get to a really bad outcome, I think you’re going to get some kind of voluntary process in place first and that means it doesn’t necessarily trigger CDS, it doesn’t necessarily get people into trouble straight away,” PIMCO’s Luke Spajic told Bloomberg.
“There will be this kind of soft, coercive suggestion that the debt should be extended.”
Greek government bond yields and five-year credit default swaps have surged to record levels since Luxembourg Prime Minister JeanClaude Juncker, who also leads the group of euro-area finance ministers, said earlier this month he wouldn’t rule out a “reprofiling” of Greek debt.
Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
Yesterday, European Economic Commissioner Olli Rehn said that the European Commission is evaluating a mechanism to “reprofile” Greek debt on a voluntary basis, without reducing the debt’s capital.
The mechanism must be voluntary to avoid scaring lending nations, he said.
The yield on 10-year Greek government bonds was 16.8 percent yesterday, while the spread over similar duration German bunds was 1,376 basis points.