Bloomberg News

Euro Finance Chiefs Split on Bondholder Role in Greek Rescue

June 14, 2011

(Updates with comment from economist in fourth paragraph, Dutch finance minister in 16th.)

June 14 (Bloomberg) -- European finance chiefs are divided on how to involve private investors in a second bailout for Greece and stave off the euro area’s first sovereign default without running afoul of the European Central Bank.

“You can’t leave the profits with the banks and make the taxpayers shoulder the losses,” Austrian Finance Minister Maria Fekter told reporters in Brussels today before an emergency meeting on Greece. “Ministers have different positions,” she said. “We’ll put them on the table and look at where the compromise lies.”

Pressure on the finance ministers to craft a rescue plan intensified after Standard & Poor’s slapped Greece with the world’s lowest credit rating. The euro group seeks to reach a consensus for easing Europe’s biggest debt burden before a summit of European Union leaders on June 23-24.

“The obvious implication is they will reach agreement as the alternative is a disaster,” said David Mackie, London-based chief European economist at JP Morgan Chase & Co. A compromise will be made to “get us through a few weeks or months, but if Greece keeps under-delivering then at some stage we’ll be back in the same position.”

Chinese Reaction

Yields on 10-year Greek bonds touched 17.46 percent today, a record in the 17-nation euro-area’s history. The slump pushed the extra yield, or spread, that investors demand to hold the country’s 10-year bonds instead of similar maturity German bunds to a record. The euro rose 0.6 percent on the day.

Europe’s sovereign debt crisis could worsen and spread, posing a major risk to the global economic recovery if euro-area countries don’t set up a reliable long-term crisis management mechanism, the People’s Bank of China said in its annual financial stability report posted on its website today.

ECB policy makers have warned against German proposals that maturities on Greek debt be extended for seven years, an outcome rating companies have said would be considered a default. ECB President Jean-Claude Trichet attended today’s meeting.

Mario Draghi, the incoming ECB president, signaled he may favor a voluntary rollover of Greek debt by investors in the style of the 2009 Vienna initiative.

‘Voluntary’ Measures

“The Vienna initiative looks to me to be entirely voluntary,” Draghi told lawmakers in Brussels today at his confirmation hearing for the top ECB post. “The ECB is not in favor of restructuring and haircuts” and it “excludes all concepts that are not purely voluntary,” Draghi said.

Thirteen months after Greece was granted a 110 billion-euro ($159 billion) bailout that failed to halt the spread of the debt crisis to Ireland and Portugal, politicians are at odds over fulfilling a pledge to make creditors pick up some of the cost of a second rescue. Trichet said June 9 that governments were flirting with what could be a “enormous mistake.”

Germany and France, Europe’s two biggest economies, are on opposite sides of the dispute, with France indicating backing for the ECB’s view. While French Finance Minister Christine Lagarde has ruled out any action that constitutes a “credit event,” her German counterpart, Finance Minister Wolfgang Schaeuble, said June 10 that Europe’s biggest economy “has to insist on the participation of the private sector” in Greece.

‘Opening Gambit’

“It may be fair to assume that the maturity extension plan will at least be the Germans’ opening gambit,” Kornelius Purps, a fixed-income strategist at Unicredit SpA in Munich, said by telephone. That “would never work with bondholders as a voluntary move nor with the ECB.”

Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said before the meeting that “all options” will be considered regarding Greece.

Finance ministers including Elena Salgado of Spain and Didier Reynders of Belgium stressed that any decision must satisfy the ECB’s concerns.

“They’ll find a way to make it safe, which is what the ECB and French want, and make it irrevocable and grant more time, which is what Germany wants,” said Gilles Moec, co-chief European economist at Deutsche Bank AG. “There’s no plan B. We have to come up with a solution.”

Private-sector investors should contribute at least 30 percent of possible additional refinancing aid for Greece, Dutch Finance Minister Jan Kees de Jager said.

‘Special Rights’

“There are ways to make it attractive for private parties to participate voluntarily in extending debt,” De Jager said in Brussels. “For instance new bonds, which replace old ones, can be given new special rights the old bonds lack.”

S&P said yesterday that Greece is “increasingly likely” to face a debt restructuring, reflecting political pressure on investors not to dump Greek holdings. The cost to insure Greek debt, the most expensive in the world, indicates a chance of about three in four that Greece will default in the next five years.

The Greek government sold 1.6 billion euros of 26-week treasury bills today at a yield of 4.96 percent as preliminary data from the Finance Ministry in Athens showed the central- government budget deficit widened in the first five months of the year to 10.3 billion euros.

It’s “100 percent certain” that Greece will default and “the only question is what euphemism will be dreamt up to cloak the fact,” said Niall Ferguson, a history professor at Harvard University and a Bloomberg Television contributing editor.

“The race is on to find a way of saying Greece hasn’t really defaulted even though it’s not making good on its interest payments,” he said on Bloomberg Television’s “InsideTrack” today. “Good luck with that.”

--With assistance from Rainer Buergin, Lorenzo Totaro, Gregory Viscusi, Jonathan Stearns and Rebecca Christie in Brussels, Brian Parkin in Berlin and Simon Kennedy in London. Editors: Patrick G. Henry, James Hertling

To contact the reporters on this story: Alan Crawford in Brussels via acrawford6@bloomberg.net; Stephanie Bodoni in Brussels via sbodoni@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; Anthony Aarons at aaarons@bloomberg.net


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