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Sovereign writedowns could hurt banks, euro: ECB *PIC*

Sovereign writedowns could hurt banks, euro: ECB (by William L. Watts)

FRANKFURT (MarketWatch) -- The European Central Bank on Thursday reiterated a warning that forcing private-sector bondholders to take losses on sovereign debt could hurt the euro and the euro-zone banking sector. "While PSI [private-sector involvement] is certain to place significant stress on the solvency of banks and other private institutions in the country concerned, it will also have an impact on the balance sheets of other euro area countries" due to cross-border relationships, potentially triggering the need for "large-scale" bank recapitalization, the ECB warned. It could also spur contagion across the euro zone by triggering risk aversion in financial markets, the ECB said. "PSI could also damage the reputation of the single currency internationally, possibly adding to volatility in foreign exchange markets," the bulletin said, reiterating the ECB's advice to avoid any writedown efforts that aren't "purely voluntary" while avoiding any sort of default.