European finance ministers are considering making banks take bigger losses on Greek debt and have postponed a vital aid payment to Athens until mid-November, setting up a moment of truth in the eurozone's sovereign debt crisis. Greek Finance Minister Evangelos Venizelos said the country had enough cash to cope until then and insisted that eurozone ministers are not preparing for a Greek default, despite the ominous delay.
---- Greek aid payment delayed until mid-November
---- Finance minister says no talk of Greek default
---- Greek protesters block ministries on Pasok's 2nd anniversary
"There is no discussion of default," Venizelos told a news conference on returning to Athens on Tuesday. European bank shares tumbled for the second day, leading a broader stock market retreat, after the 17 finance ministers, meeting in Luxembourg, called for a review of a July 21 debt swap agreement with private holders of Greek bonds.
Investor confidence was also hit by deepening trouble at Franco-Belgian bank Dexia, a municipal lender with big holdings of Greek and other peripheral eurozone debt, whose shares plunged by more than 20 percent on Tuesday after losing 10 percent on Monday. France and Belgium said they would guarantee the financing of the stricken bank and do whatever is necessary to protect account holders and creditors.
Belgian Finance Minister Didier Reynders said a separate "bad bank" would be created to isolate and dispose of Dexia's toxic assets, but a French source close to the matter said no state capital injection was in the works. The euro hit a nine-month low against the dollar and a 10-year low against the yen. Investors sought refuge in German government bonds, but the cost of insuring even those safe-haven Bunds against default hit another record.
Analysts said the delay in disbursing an 8 billion euro loan instalment and the reopening of the private sector deal increased the likelihood of a default once the currency area has its new financial firefighting tools in place. "If they are having problems getting the sixth tranche of funding, what's going to happen to the seventh tranche of funding in three months' time? The situation is going to be even worse then. So Greece is on the brink," said Nick Stamenkovic, bond strategist at RIA Capital Markets.
Jean-Claude Juncker, chairman of the 17-nation Eurogroup, said ministers were reassessing the extent of private sector involvement in a planned 109 billion euro second rescue package which may now prove insufficient after Athens admitted it would miss key deficit targets.
Under the July deal, private creditors agreed to a 21 percent write-down on their Greek holdings via a plan to lighten and stretch the debt burden, with eurozone governments funding credit enhancements to attract voluntary participation. Now that Greece's economic growth and deficit situation has worsened, that deal needed to be reviewed, Juncker said.
"As far as the PSI (private sector involvement) is concerned, we have to take into account the fact that we have experienced changes since the decisions we took on the July 21, so we are considering technical revisions, so yes," Juncker told reporters. A senior eurozone source said banks might have to take a bigger write-down, and a bond buy-back scheme could be expanded, to achieve the same 50 billion euro private sector contribution as was agreed in July.
Austrian Finance Minister Maria Fekter said the review was necessary because most bondholders had chosen the option most expensive for governments, skewing the cost of the operation. Juncker also disappointed analysts by saying the European Central Bank was not the main avenue being explored to increase the firepower of the eurozone's rescue fund.
His comment, reflecting strong German opposition to using the ECB to leverage the European Financial Stability Facility, raised doubts that the bailout fund can be sufficiently scaled up to calm febrile markets. The United States has urged the eurozone to leverage the 440 billion euro rescue fund to buy government bonds from the market, recapitalise banks and extend precautionary credit to sovereigns, but political resistance to pouring more public money into bailouts is growing across northern Europe.
In Athens, striking public sector workers blockaded the entrance to several ministries on the second anniversary of the ruling Socialist party's election victory, disrupting talks with EU and IMF inspectors on the next aid tranche.
Despite more than six hours of talks, the eurozone meeting produced few concrete steps to tackle the deepening sovereign debt crisis, raising expectations that Greece will end up having to default on its 357 billion euros of debts. The only minor advance was a deal resolving a dispute over Finnish demands for collateral from Greece in return for new loan guarantees. The convoluted arrangement seemed designed to deter other countries from seeking similar special terms.
A tentatively planned October 13 finance ministers' meeting, due to have signed off on the next payment to Greece, was scrapped, giving the EU and IMF inspectors several more weeks to report back on Athens' austerity measures, lagging economic reforms and privatisations. Greece's draft budget sent to parliament on Monday showed this year's deficit would be 8.5 percent of gross domestic product, well above the 7.6 percent agreed in Greece's EU/IMF bailout programme, the benchmark for future EU aid.