What Europe's Leaders Know: Bondholder Haircuts Could Equal Defaults And Runs On Banks

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Photo: Wikimedia Commons

If Central European leaders get their way, and include private sector participation in the next Greek bailout, the result could be the default of Greece, a whole new banking sector bailout, and a run on Greek banks including to a European Commission document obtained by the Financial Times.The document details how any private sector involvement in the Greek bailout would likely trigger a partial default for the country, ending the ability of Greek banks to use sovereign debt as collateral at the ECB. That would result in the need for a bailout of around €20 billion for Greece’s banks. Greece may not be able to go back to the market for many years to sell its debt as a result of the event. Finally, the resulting plunge in confidence in Greece may lead to a bank run in the country.

You can read portions of the document at the FT. But what this does confirm is that European officials, including the leaders of Germany, Finland, and Austria, are aware that a credit event (of unknown severity) will be triggered in the event of private sector involvement in Greece.

If they know that, then they must also know that a run on Greece’s banks, or lack of access to ECB financing facilities, could be incredibly dangerous for other European countries and their banking sectors.

The debate clearly is still over the terms of private sector involvement. If Germany isn’t willing to acquiesce to a no private sector involvement deal, then we’re going to get some sort of damaging event, regardless of final deal details.

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