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Thursday, 7 July 2011

Dutch Finance Minister De Jager wants to force banks into burden sharing, thus triggering a credit event. Ignorance is bliss?

The latest episode of our continuing series “PIIGS in the Euro-space” stars Greece, the Dutch Finance Minister Jan-Kees de Jager, the Dutch banks and the three ratings agencies Moody’s, Standard & Poor’s and Fitch.

Finance Minister De Jager is not convinced at all that the large (Dutch) banks will voluntarily support burden sharing, in case of Greece. Therefore he wants to enforce the ‘voluntary’ bank support. But did he think of the consequences?

The Dutch financial newspaper “Het Financieele Dagblad” ( reports on this story. Here are the pertinent snips of this article:

It is impossible to let banks support a Greek financial rescue program voluntarily, without any form of government interference. Therefore the private sector should be forced to participate in such a rescue programme. That the ratings agencies see this as an actual Greek default, is considered an acceptable risk.

That is stated by Dutch Finance Minister Jan Kees de Jager against ‘Het Financieele Dagblad’. “I think that we should accept that a voluntary contribution of the banks is not a realistic scenario. When a mandatory contribution leads to a short-lived and isolated rating-event, this is not very bad, as Greece is currently off the financial markets and won’t return there at short notice”. The Dutch Finance Minister gave this statement after a visit to his fellow minister, Chancellor of the Exchequer George Osborne in London.

Herewith De Jager admits that it is not possible to reach a voluntary agreement with banks, insurers and pension funds. The countries of the euro-zone try to set-up a package of €85 bln in financial support for Greece, in which the financial sector has to participate substantially. Ratings agency S&P already stated that such an operation is not considered voluntarily and it would distinguish Greece as ‘a nation in default’.

Herewith the minister clearly ignores all warnings of the central bankers. According to the ECB, an enforced contribution of the banks would lead to a downgrade of Greek ratings to ‘default status’ and thus to great unrest on the financial markets. Some central bankers warn for the comeuppance of a situation as grave as the demise of Lehman Brothers in 2008.

There is also the risk that banks are obliged to revalue their portfolios of Greek sovereign bonds to market value: marked-to-market. Sovereign bonds that are not held for trading purposes may still be held against historic purchase value. When the rating agencies consider Greece as a ‘nation in default’, the banks could be forced by their auditors, to write-off substantially  on their portfolios of Greek sovereigns.

De Jager thinks that the risks can be contained: “I am not so afraid for a downgrade of the ratings for Greece”. He considers it a possibility to prevent a Greek default, thus preventing the comeuppance of the situation where the central bankers are warning for.
I will start with the remark that, according to me, all attempts of the Euro-zone to prevent a Greek default are a useless waste of taxpayer money. I would rather have the situation of a ‘controlled default’ in Greece (if any of such is possible), where Greece puts a haircut on its sovereigns and bears the consequences of its erratic and irresponsible financial behavior of the last 20 years. The members of the Euro-zone could subsequently offer their help in minimalizing and smoothening the consequences of this default, without gaining real responsibility for this.

By persistently helping the Greek government and officials to avoid a credit event, the pain and responsibility of causing such an event is never felt by the Greek government; and why should they change their erratic behavior then? Of course, this approach would bear a great risk of contagion to the other PIIGS, but the current approach of ‘pampering’ the PIIGS-countries and cursing at the ratings agencies is just as useless. The financial markets show every day that it doesn’t believe in this approach.

After having said that, I must admit that Jan Kees de Jager did not act very smart if he wants to avoid a credit event. You may reckon with it, that his words have been heard very well all over the world and especially at the ratings agencies. If a voluntary contribution of the banks might trigger a credit event (S&P), then you can be 100% sure that an involuntary contribution of the banks WILL trigger a credit event. This means that the Credit Default Swaps (CDS) on Greece would be activated.

The chance of such a credit event happening, without sending shockwaves through the financial world, is very slim. If De Jager outered this statement to push the banks into supplying a voluntary contribution for Greek financial support, he might have succeeded after all. If he didn’t mean to do so, than he has the dubious honor of having the financial world scared sh*tless: ‘ignorance is bliss’, but not in this special case.

The red and bold text in the quote is to remind you that the balance sheets of the (large) European banks might not be what they seem: there is probably still a lot of ‘air’ in the bond portfolios, not meant for trading. If Greek sovereign bonds are still on the balance for 100% of their purchase value, just like Spanish, Italian and Portuguese sovereigns, the world might be in for another round of bank bail-outs. For the exposure of the Dutch banks, insurance companies and pension funds to the PIIGS-countries, please read: Dutch exposure to Greece and the other PIIGS-countries

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