Bank debt: Eurozone crisis systemic, Trichet says

Bank debt crisis has reached point where governments need to move decisively, Europe's central banker says. Fears of government defaults have spread to markets and fears about bank debt and funding.

Thierry Roge/Reuters
European Central Bank President Jean-Claude Trichet addresses the European Parliament's Economic and Monetary Affairs Committee in Brussels Oct. 11, 2011. Mr. Trichet says the fears about government debt have spread to bank debt and is drying up bank funding.

The eurozone debt crisis has reached a systemic dimension that threatens banks and the wider economy, European Central Bank president Jean-Claude Trichet warned Tuesday, as Greece awaited approval of bailout loans it needs to avoid bankruptcy.

Trichet said "the crisis has reached a systemic dimension" and spoke out strongly in favor of boosting the continent's banks' health with new funds to weather the sovereign debt crisis.

Speaking as head of the eurozone's new risk-watchdog, the European Systemic Risk Board (ESRB), he told a European parliament Committee in Brussels that market fear about government debt has spread to bank debt around the world and is drying up bank funding.

"The banking sector in Europe needs recapitalization, that is part of our message," Trichet said.

Now "it is a matter of urgency" that governments move "decisively to tackle" the crisis, he added. "The high interconnectedness in the EU financial system has led to a rapidly rising risk of significant contagion."

Trichet's warning came as Jean-Claude Juncker, prime minister of Luxembourg and head of eurozone finance minister meetings, said Greece's bondholders would have to take sharp writedowns.

He was quoted late Monday by Austrian state broadcaster ORF as saying that eurozone countries are "talking about more" than a 50 to 60 percent haircut for Greece, though his spokesman later corrected his statement to say he meant more than 21 percent.

Experts and investors believe Greece's debt situation is untenable, even with more reforms and austerity measures, and will need to write off some of the money it owes bondholders.

Greece's second bailout, which was agreed in July but has yet to be finalized, proposed a 21 percent cut in bond repayments. Economists, however, say a 50 percent reduction would be necessary.

In the near-term, Greece depends on regular installments of bailout loans, but whether it gets the next €8 billion ($10.9 billion) will depend on a review of its reforms by international debt inspectors to be wrapped up on Tuesday.

The International Monetary Fund, European Central Bank and European Commission are checking whether Greece has done enough to qualify for the next batch of its vital international bailout loans. Without them, the country will run out of money to pay pensions and salaries by mid-Novemeber and could be unable to repay bondholders in December.

As the debt inspectors concluded their talks, protests caused more disruption in the capital.

Workers at a key refinery went on strike, sending motorists who feared a fuel shortage to form huge lines at gas stations to fill up. A strike by municipal workers has left garbage piling up in in mounds on city streets for days. Protesters have also staged sit-ins of state buildings, including those of the water company.

Greece has been locked out of the international bond market for more than a year due to the high interest rates demanded for its bonds, but regularly issues short-term treasury bills.

The country raised €1.3 billion ($1.8 billion) on Tuesday in the auction of 26-week treasury bills at an interest rate of 4.86 percent, marginally higher than the 4.8 percent yield in a similar sale on Sept. 6, the debt management agency said.

Demand was also slightly lower, with Tuesday's sale 2.73 times oversubscribed compared to 3.02 times in September. The country had initially been seeking to raise €1 billion.

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