Greece hit by bank shares plunge, Spain says no need for bailout

30 Oct

Shares in Greek banks plunged Monday as the finance ministry dashed hopes of help from the EU’s new rescue fund, while Spain reiterated that it had no need of a bailout of its own for now.

A Greek banking sub index plummeted 15.97 percent at the close, dragging down the main ASE market index by 6.28 percent to 819.61 points after the finance ministry said Greek banks would not be able to swap greatly devalued holdings of national debt for bonds issued by the new European Stability Mechanism.

The ministry broke the news shortly after a meeting between Finance Minister Yannis Stournaras and the Greek banking federation to discuss the bank’s urgent plight.

Greece hopes to help recapitalise its banks, hard hit by the writedown of national debt, deep recession and capital flight, with money from the next installment of rescue funds from the International Monetary Fund (IMF) and European Union (EU), which still hangs on completion of new reforms.

Eurozone ministers and officials are to hold a series of potentially critical meetings in the coming weeks to decide whether Athens has done enough to get its next installment of 31.5 billion euros ($40.7 billion) in aid and avoid bankruptcy next month.

Ministers were also looking at a Greek request for the terms of its bailout to be extended by two years to 2016, allowing it to spread out the pain of the tough austerity measures it has agreed to in return for help.

The Greek finance ministry also delayed the release of banks’ quarterly results by one month due to delay of the bailout funds.

Meanwhile, Spanish Prime Minister Mariano Rajoy said that a rescue line from the European Central Bank was “not essential” for his country’s economy for now.

“The government has not requested it because it understands that at the moment it is not essential to defend the interests of the Spanish people”, Rajoy said during a joint news conference with Italian Prime Minister Mario Monti.

If Spain, the eurozone’s fourth-largest economy, does request help, some analysts fear that Italy could be next in line as financial markets seek out the next weak link, creating a domino-like ripple across the most fragile members of the 17-nation region.

There was also good news for Ireland, with German Finance Minister Wolfgang Schaeuble saying that Ireland should be treated as a “special case” with respect to the treatment of its bank debt by the EU’s new financial firewall.

Comments by German Chancellor Angela Merkel earlier this month at a summit of EU leaders that countries which have already bailed out their banks could not benefit from direct recapitalisation funds from the EU’s new ESM rescue fund spooked many in Ireland.

Direct bank recapitalisation is meant to prevent banking crises from turning into national debt crises when governments are forced to bail out their financial sectors.

That is what happened to Ireland after government efforts to keep its banking sector afloat left it virtually bankrupt, and forced it to seek an EU-IMF bailout in late 2010.

Dublin argues that it should still benefit from bank recapitalisation funds because, under pressure from EU partners it did not force private investors to take a hit on their Irish bank bond holdings.

French President Francois Hollande also found himself under pressure, with business leaders calling for a two-year shock plan to boost competitiveness.

The heads of 98 of the biggest French groups on Sunday pleaded the case for a 30-billion-euro cut in social charges paid by French employers over two years, and massive cuts in public spending.

Hollande said that his government’s plan to revive French industrial competitiveness, to be adopted next month, would instead spread out reforms over his five-year term.

“All the indicators show that we are not in the best of situations,” the Socialist leader said after he held talks in Paris with the heads of leading global economic institutions, including the World Bank and the IMF.


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