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"If I were Papandreou, the only thing I would want from Merkel and Sarkozy would be to guarantee the Greek banking system", said the economist at the University of Geneva Howard Hau in a GRReporter interview a few weeks ago. For some time now, he has been warning in his analysis that the Greek debt haircut would be inevitable and that when it happens banks would be most vulnerable.

For months, Greek politicians, economists, financiers and bankers had buried their heads in the sand to the unpleasant but approaching reality that came upon them yesterday, when the Chancellor of Germany Angela Merkel openly talked about an around 50 per cent haircut of Greek government bonds.

Moody's even forecasts a haircut in the range of 60 per cent. This is a very unpleasant development not only for the Greek banking system, but also for the European one, and at the same time, it will cause political turmoil.

Greek financial institutions will remain isolated from world markets for at least 5 years, their liquidity problems will worsen, and their dependence on the countries of the euro area will become even greater. According to Moody's report, in the case of a 60 per cent haircut combined with bad loans, the number of which will increase due to the recession, local banks will need a total capitalization of € 44 billion, i.e. 2.5 times more money than their current capitalization. Not surprisingly, Greek bankers are anxiously following the thriller of the Greek debt haircut.

Europe is divided into two for now. On one side is the increasingly less popular French President Nicolas Sarkozy and the European Central Bank that do not want a new haircut on the Greek debt other than that agreed on July 21. Sarkozy because of French banks ‘exposure to Greek bonds, and Jean-Claude Trichet because of the fact that the European Central Bank already holds Greek government bonds worth € 53 billion. On the other side is Angela Merkel, who insists, for domestic reasons, that private lenders take on most of the Greek debt haircut. A haircut of 50-60 per cent of the bonds maturing in 2020 will lead to huge losses for the Greek financial system, while a haircut of about 30 per cent of all bonds would have a softer impact.

From the possible partial remission of the loans, the Greek state will gain about € 15 billion. It will have to immediately return this amount to the European Financial Stability Facility to recapitalize the banks. Financial analysts quoted by Imerisia newspaper doubt that Greece will be able to rely so much on the voluntary involvement of local private lenders in the PSI mechanism - Private Sector Involvement. According to them, even when talking about cuts of 21 per cent, requests for 83 per cent of the desired quantity are collected. The same analysts estimate that European private creditors are even more reluctantly involved in the "voluntary" debt remission and in cases when the state guarantees the not remitted remainder of the loan.

"If the haircut is increased, it won’t be of much use. It will simply be a political whim. We will gain nothing from the spread of the crisis," says Josef Ackermann, CEO of Deutsche Bank. "We should focus on implementing the decisions we have already taken," says Charles Dallara, president of the Institute of International Finance, which is handling the "voluntary" involvement of private creditors in the 21-per cent haircut on Greek bonds. Another risk is that markets could interpret a significant haircut as a credit event. Then the benefits that will be paid for the CDS insurances on Greek government bonds will be between € 80 and 100 billion.