European uncertainty and Greek debt

The U.S. market faced some selling on Tuesday afternoon after reports surfaced about France and German having disagreements over the European rescue fund, known as the EFSF (European Financial Stability Facility). France wants to have the EFSF to become a bank while the European Central Bank  (ECB) and Germany are opposed to this plan.

Greece is still in need of their second round of bailout money. During a preliminary July agreement, the EU temporarily agreed to provide Greece with an extra €109 billion in rescue loans. Approximately 1/3 of that loaned EU money would go towards establishing collateral funds for banks that protect them against further losses on their Greek debts.

If approved, the July deal would lead to losses of some 21 percent on Greek bond holdings, the majority coming from cuts in interest rates and deferred payments.

Germany is advocating for banks to accept cuts of 50 percent to 60 percent on their Greek bond holdings in the plan. Germany does not face as much banking exposure to Greek debts compared to France.

French banks are currently facing high exposure to Greek debts and they are encountering pressure from concerned bank investors because if their banks suffer from Greek losses, the net effect could negatively impact France’s own AAA credit rating and reduce their borrowing status.

France is demanding that EU leaders should only make technical revisions to the preliminary agreement that was approved with private investors in July. France does not want their banks to accept cuts on their Greek bond holdings. Meanwhile, Germany is concerned about the financial burden that German tax payers will be faced with as a result of the Greek bailout.

Yesterday in Greece the Greek Parliament gave approval yesterday to further austerity measures which includes public sector layoffs, additional wage and pension cuts, and changes to collective bargaining rules. This news was not well received. Large protests and social unrest occurred on the streets in Athens.

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