Accounting Issues Could Stall France’s Greek Debt Plan

By Alex Chambers and Helene Durand | June 28, 2011

Accounting issues remain a formidable obstacle facing private sector investors currently considering the French banking sector’s plan for restructuring Greek government debt.

The plan’s focus was initially on how to avoid triggering credit default swaps written on Greece, and preventing rating agencies declaring the sovereign in default.

But, according to bankers who have worked on similar ideas on resolving the Greek debt crisis, there is a high risk the French plan could risk hurting banks’ balance sheets.

One said that, given the proposal to issue a new security and its structure, it would be very difficult for auditors to allow banks’ held-to-maturity (sometimes known as banking book) portfolios to remain marked at par.

Senior bank officials are aware of these possibilities.

Deutsche Bank chief executive Josef Ackermann told Reuters Insider: “We have to take into account which consequences a rollover has on the accounting of the banks. A rollover could lead to significant write downs”.

The way auditors treat any restructuring proposal will have a huge impact on whether banks will be willing to participate.

As a large majority of sovereign debt is held in banking books, banks have not had to mark their holdings down to market levels.

Having been issued at around 100 percent of face value, two and five-year Greek government benchmark bonds are currently at 67/71 and 50/54 respectively.

However, as soon as the securities are rolled into a new one, banks and other investors could have to mark to market, crystallizing the difference between where they bought bonds and their current value.

The key aim of the plan is also to help ensure that Greece can reach €30 billion [$43.08 billion] of government financing from private investors by July 1, 2014 and to prevent CDS triggering.

There are other conditions under the plan such as informal clearance from rating agencies, ECB willingness not to sell its Greek debt holdings until July 2014, a significant participation from bondholders, and an ongoing commitment from the European Union and the International Monetary Fund as well as Greece respecting its commitments.

(Reporting by Helene Durand and Alex Chambers, IFR Markets; Editing by Dan Lalor)

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