Greek accounting: fresh calculations

Financial Times
July 7, 2011

As she took office this week as head of the International Monetary Fund, Christine Lagarde hogged the limelight. But the banks that own Greek debt, and their investors, would perhaps be better advised to watch another new kid on the block. Hans Hoogervorst, who took the reins as the head of the International Accounting Standards Board last Friday, made his maiden speech this week and immediately established himself a heavyweight in the debate over the Hellenic Republic’s debt problem.

Mr Hoogervorst wants the European Union to endorse an accounting standard released in 2009 that determines how financial assets – including Greek bonds – are written down. Doing so, he said, would allow more “leeway” if there is a default. That is an understatement. The proposed rules would allow banks to calculate any write-off by examining the expected cash flows on Greek bonds and in most cases discounting them at the interest rate at which they originally bought them. By contrast, the existing rules demand that the market rate be used. The difference for banks that bought five-year Greek debt in 2008, when it yielded 5 per cent, is huge, given that it now yields 20 per cent.

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