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German Banks Near Greek Plan as Ackermann Aims to Avoid Meltdown

June 29, 2011

(See EXT4 <GO> for more on the sovereign debt crisis.)

June 30 (Bloomberg) -- German financial companies pushed toward an agreement to roll over their Greek debt holdings as Deutsche Bank AG Chief Executive Officer Josef Ackermann predicted banks would contribute to help avert a “meltdown.”

Representatives of German banks and insurers hammered out a draft proposal to present at a meeting today with Finance Minister Wolfgang Schaeuble and top industry executives, including Ackermann. The German firms, which are using a French proposal as a blueprint for discussions, are likely to commit to contributing to the Greek rescue, while calling for a Europe- wide solution, said people familiar with the plan.

Financial institutions would “offer our hand in a solution,” Ackermann told Chancellor Angela Merkel at a conference in Berlin yesterday. “Not because we’re doing it gladly, but actually to enable policymakers to do something so that we -- I’ll say it frankly -- so that we don’t have a meltdown.”

Commerzbank CEO Martin Blessing, speaking at the same event, said German financial institutions have reached a draft agreement on participation in a Greek rescue, although there are still “a few hitches.” The remarks by the CEOs of Germany’s two biggest banks coincided with the Greek parliament approving the first part of an austerity plan aimed at meeting European Union aid requirements and staving off default.

Debt Rollover

German and French lenders are the biggest foreign holders of Greek debt and their participation is key to the European Union goal of getting banks to roll over at least 30 billion euros ($43 billion) of bonds. German firms and the finance ministry are discussing the idea of rolling over bonds maturing until 2020, and not just those running through 2014, as had been first envisaged, said the people, who declined to be identified because the talks are confidential.

Talks yesterday centered on Greek holdings and how much debt firms are willing to roll over, the people said. Potential sticking points, including the maturity of the Greek bonds, whether investors would face writedowns on their current holdings, and how rating companies would view a rollover, were also discussed, they said.

Beyond Lehman

“If Greece goes into default, then we would have a disruption in Europe that could more quickly impact other countries in a way that goes far beyond what Lehman Brothers meant for us,” said Ackermann, 63.

The bankruptcy of Lehman Brothers Holdings Inc. in September 2008 set off a credit squeeze that forced governments from the U.S. to Germany to Britain to bail out financial institutions.

Ackermann, who is also chairman of the Institute of International Finance, which represents more than 400 financial companies, said they are “working around the clock” with special teams, rating companies and bodies overseeing credit- default swaps to test whether any agreement would trigger a credit event. He warned that any agreement is “highly complex” and could force investors to write down their Greek holdings by an estimated 30 percent to 45 percent if done incorrectly.

Lorenzo Bini Smaghi, a European Central Bank executive board member, called the French proposal to address the Greek debt crisis “interesting,” and said a credit event must be avoided. He spoke in a Les Echos interview.

Schaeuble will hold talks with the heads of German banks and insurers, his deputy, Joerg Asmussen, said June 28. The meetings are part of Europe-wide efforts to get creditors to share the cost of a second Greek bailout and prevent the euro- region’s first default, a year after a 110 billion-euro package failed to resolve the debt crisis.

French Plan

Schaeuble sees a French proposal to roll over Greek debt as a “good basis” for talks, Asmussen said.

Under the French plan, private investors would receive new Greek 30-year bonds worth 70 percent of their original holdings through June 2014, with the remaining 30 percent paid in cash on maturity. Greece would use 50 percent of the original amount to pay down its debt, with 20 percent invested in zero-coupon bonds through a special purpose vehicle that will be used as collateral to insure the banks get repaid.

Banks that roll over their debt under the French plan would receive 30-year bonds with a coupon of about 5.5 percent, which could be increased by as much as 2.5 percentage points based on the pace of Greek economic growth, the people said.

In a second option, investors would reinvest at least 90 percent of their redemptions into five-year Greek government debt with a coupon of 5.5 percent, according to the proposal.

Some German lenders may favor the first option, while others with shorter-term Greek debt may prefer the second.

The plan depends upon credit-rating firms not cutting their grade on Greece and existing or newly issued government securities to default, according to the French draft proposal.

The French plan to roll over Greek sovereign debt has the backing of most of France’s banks and insurers, and it’s now up to investors in Germany and elsewhere in Europe to agree to a strategy, according to two people familiar with the matter.

--With assistance from Fabio Benedetti-Valentini in Paris, Rainer Buergin in Berlin and Benjamin Harvey in Istanbul. Editors: Frank Connelly, Stephen Taylor

To contact the reporter on this story: Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Edward Evans at eevans3@bloomberg.net


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