Slovakia Set to Ratify Deal: Could Include 50% Bank “Haircut”

Slovakia will hold a “do-over” vote later this week where it is expected to now vote in favor of a scheme to address the escalating Eurozone debt crisis. The Slovakian Parliament earlier rejected the proposal and was the lone holdout of the 17 Eurozone member nations. With this final approval expected to be in place by the end of the week, the last obstacle to the plan put forward by the “troika” comprised of the European Union, the European Central Bank, and the International Monetary Fund will be set aside.

Eurozone leaders are scheduled to meet on October 23rd to finalize the details of the plan. Speculation continues to surround the centerpiece of the agreement which calls for private investors to accept a repayment “haircut” to lighten Greece’s debt obligations and avoid an outright default.

Earlier this year, financial institutions had been asked to take a 21 percent loss as part of the discussions leading to the second bailout for Greece. It appears that the actual haircut could be considerable greater with losses of between 30 and 50 percent now being suggested.

As part of the plan championed by France and Germany, banks will receive financial support to ensure these forced losses do not endanger the banking system. Coincidentally, these two countries are home to the banks most heavily exposed to Greece’s debt and have the most to lose as part of a forced recapitalization.

Despite being under orders to reign its deficit, Greece’s budget shortfalls continued to widen in the first nine months of the year. By the end of 2011, Greece’s total debt is expected to rise to 357 billion euros ($487 billion) – this level of debt represents 162 percent of the country’s total Gross Domestic Product.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.