Treasury urges British banks to take big losses to help Greece avoid meltdown

Guardian
June 25, 2011

Britain's banks will be urged by the Treasury to take multimillion pound losses as part of Europe-wide plans to prevent a catastrophic meltdown of the Greek financial system.

Despite the assurance of David Cameron that the UK taxpayer will not pay towards the latest EU bailout of Greece, Treasury officials are working behind the scenes to persuade British banks holding Greek bonds to take a "haircut" now as the best way to avert a potential global crisis. Britain's banks hold about £2.5bn of Greek bonds.

One idea, proposed by Germany, is that the banks would be persuaded to swap Greek bonds for loans on less favourable terms when they expire – a so-called "soft restructuring" that would help ease the pain for Athens.

Politicians across the EU are battling to secure "private sector involvement" in the Greek rescue alongside government and IMF help in the hope of preventing Athens from defaulting on its debts, a move they fear could start a ripple effect in world markets.

Analysts say even a debt swap, under which Athens would pay its debts over a longer period, would leave bondholders facing a reduction in the value of their investment. But officials argue that only if private banks take a hit now can the damage be limited.

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