Banks accused of talking up Greek debt fears

BERLIN—The head of Europe’s rescue fund was quoted yesterday as telling a German newspaper that he believes banks are encouraging talk of a possible Greek debt restructuring because they are hoping to earn large fees. Klaus Regling, the head of the European Financial Stability Facility (EFSF), told the Handelsblatt business daily in an advance released yesterday that he sensed banks were thinking of their own profits in fuelling a discussion about restructuring.

“In the 1980s and 1990s banks cashed in very high fees for the restructuring of sovereign debt in Latin America and Asia,” Regling was quoted saying. “They would like to do that again in Europe.” Regling said on the one hand a partial relief for Greece’s debts would hit some banks’ own balance sheets as lenders. But those losses would be “limited” while the fees involved with a restructuring would be “very promising.” The Handelsblatt quoted sources as saying European Central Bank president Jean-Claude Trichet also believes banks are deliberately talking up the possibility of a Greek debt restructuring.

The newspaper said Trichet had warned euro zone finance ministers explicitly against allowing the banks to influence them. Mounting fears that Greece will have to restructure a debt mountain expected to reach 340 billion euros this year, roughly one and a half times its output, have pummelled Greek bonds, driving yield spreads over German bunds to new record highs. European Central Bank Executive Board members Juergen Stark and Lorenzo Bini-Smaghi have both warned against such a step, saying it would hammer the Greek banking system and damage Europe’s credibility.