Bloomberg News

Germany Seeks Extending Greek Maturities in Clash With ECB

June 08, 2011

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June 8 (Bloomberg) -- German Finance Minister Wolfgang Schaeuble said bondholders must contribute a “substantial” share of a second aid package for Greece, proposing a swap that credit-rating companies may term a default.

Schaeuble told European Central Bank President Jean-Claude Trichet and fellow euro finance ministers in a June 6 letter that maturities on Greek bonds should be extended seven years to give the debt-wracked nation time to overhaul its economy.

Any agreement on aid at a ministers’ meeting on June 20 “has to include a clear mandate -- given to Greece possibly together with the IMF -- to initiate the process of involving holders of Greek bonds,” Schaeuble wrote in the letter.

The German position clashes with the stance of European Commission officials and the ECB, which oppose anything beyond a voluntary rollover of debt as they struggle to avert the euro area’s first sovereign default. A swap offering investors terms that are “worse” than those of existing securities would constitute a coercive or distressed exchange, and be considered a default, Fitch Ratings said this week.

“Either Schaeuble softens his calls or the ECB makes further concessions,” said Christopher Rieger, head of fixed- income strategy at Commerzbank AG in Frankfurt.

Greek 10-year bonds yield almost 16 percent and the country is the most expensive in the world to insure against default, at about 1,400 basis points, according to CMA prices.

‘Unorderly Default’

With a return to capital markets in 2012 “more than unrealistic,” Greece needs more aid to avert “the real risk of the first unorderly default within the euro zone,” Schaeuble wrote.

While the size of the package can’t be assessed until the so-called troika of officials from the International Monetary Fund, ECB and European Commission give a progress report on Greece, it is likely to be “substantial” and must “involve a fair burden sharing between taxpayers and private investors,” Schaeuble said.

“This process has to lead to a quantified and substantial contribution of bondholders to the support effort, beyond a pure Vienna Initiative approach,” whereby western banks active in eastern Europe in 2009 during the financial crisis were encouraged to roll over funding to subsidiaries and inject fresh capital if needed.

“Such a result can best be reached through a bond swap leading to a prolongation of the outstanding Greek sovereign bonds by seven years, at the same time giving Greece the necessary time to fully implement the necessary reforms and regain market confidence,” Schaeuble said.

In Athens, Prime Minister George Papandreou, who will convene his Cabinet tomorrow, is seeking to damp mounting protests and dissent within his ruling Socialist party to additional deficit cuts and asset sales to whittle down Europe’s biggest debt load.

--With assistance by Jana Randow in Frankfurt. Editors: James Hertling, Andrew Atkinson

To contact the reporter on this story: Brian Parkin in Berlin at; Alan Crawford in Berlin at

To contact the editor responsible for this story: James Hertling at

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