Bloomberg News

ECB Said to Favor Greek Bond Rollover as EU Fights Crisis

June 01, 2011

(Updates with comments from Stark in third graph.)

June 1 (Bloomberg) -- The European Central Bank may back a plan encouraging investors to buy new Greek bonds to replace maturing securities, said two officials familiar with the situation, softening the ECB’s opposition to any restructuring to fix the country’s debt crisis.

The ECB is examining that step because it could ease Greece’s funding squeeze without technically constituting a default, the officials said on condition of anonymity. The Frankfurt-based Executive Board is still opposed to any extension of maturities, said one of the officials.

ECB policy makers have opposed any agreement that could be classified as a default because they fear it could spark a new round of turmoil in Europe’s banking system. European Union Economic and Monetary Commissioner Olli Rehn said yesterday that the rollover plan was being examined, as it “would not create a credit event” and ECB Executive Board member Juergen Stark told Il Sole 24 Ore newspaper in an interview published today that such an arrangement would not constitute a default.

EU officials may try to persuade investors to roll over maturing debt by offering them preferred status, higher coupon payments or collateral as inducements to buy bonds replacing Greek debt maturing between 2012 and 2014, said two separate people today. They declined to be identified because the talks are in progress.

IMF Loans

European leaders are trying to prevent the euro area’s first sovereign default. Last year’s 110 billion-euro ($159 billion) rescue failed to prevent an investor exodus from Greece, which has been saddled with Europe’s highest debt load amid a three-year economic slump.

The EU’s employment commissioner Laszlo Andor said in a telephone interview today that Europe needs to do more to help Greece, rather than demand tougher budget cuts.

“Confidence doesn’t just return by financial markets or anybody being impressed with austerity measures,” he said.

Europe’s financial leaders need to hammer out a revised Greek package by the end of June, in time to persuade the International Monetary Fund to pay out its share of the next tranche of loans. The Washington-based lender provided 30 billion euros of Greece’s original funds, along with a third of the loans since granted to Ireland and Portugal as the spreading crisis threatened to undermine the euro region.

‘Horror Story’

Greece has given up plans to go back to bond markets for funding in 2012, offering deeper deficit cuts and the sale of state assets in exchange for follow-up loans to prevent a default. Any additional needs may be released tonight or tomorrow, as European and IMF officials complete work on an assessment of Greece’s public accounts.

ECB officials from the euro region’s two largest economies have repeatedly voiced their opposition to restructuring Greece’s debt, with France’s Christian Noyer calling such a scenario “a horror story.” Bundesbank President Jens Weidmann threatened that the ECB may stop accepting Greek debt as collateral if any plan to extend the maturities of government bonds went ahead.

At the same time, the Frankfurt-based ECB’s own rules are less clear, and only say that such a step “may be warranted” if officials deem it necessary.

Hinting at a possible compromise solution, ECB Executive Board member Jose Manuel Gonzalez-Paramo said on May 26 that a so-called Vienna Initiative-style program could be “positive” for Greece. Austrian central bank governor Ewald Nowotny called the idea “interesting.”

--With assistance from Finbarr Flynn in Dublin, Sara Eisen and Flavia Krause-Jackson in New York and James Neuger in Brussels. Editors: John Fraher, Simone Meier

To contact the reporters on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net; Jeffrey Black in Frankfurt at jblack25@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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