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Germans Revive Greek Debt Swap Proposal as Banks Push Buyback

July 06, 2011

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

July 6 (Bloomberg) -- Germany revived a proposal for a debt swap to lengthen Greek bond maturities as the chief of the biggest group of international financial companies recommended that European governments buy back outstanding Greek securities.

The competing ideas underscore how investors and government officials are struggling to devise a role for creditors in a bailout of Greece without triggering a default.

The financial firms will discuss a proposal from French banks to roll over 70 percent of bonds maturing by mid-2014 into new 30-year Greek securities backed by AAA-rated collateral. European Union leaders want creditors to voluntarily roll over about 30 billion euros ($43 billion) of Greek bonds to support official loans by the EU and the International Monetary Fund.

“We’re going to discuss a range of options there, including variations on the original French proposal as well as options relating to buybacks,” said Charles Dallara, managing director of the Institute of International Finance. The Washington-based IIF represents more than 400 of the world’s biggest banks and insurers, including Deutsche Bank AG and BNP Paribas SA and has led the investor talks.

Germany dropped the idea of a bond swap two weeks ago in the face of opposition from the European Central Bank after rating companies said it would probably be termed a default.

Discussions have become possible again after the rating firms indicated that the French model would also create a so- called rating event, a German government official said by phone in Berlin today on condition of anonymity because negotiations on Greek debt are private.

Credit Event

While a swap might create a rating event, the German government sees it as limited to a short time, the official said.

The proposal was first outlined by Finance Minister Wolfgang Schaeuble in a June 6 letter to ECB President Jean- Claude Trichet, the IMF’s then-acting chief, John Lipsky, and fellow euro-area finance ministers. In it, Schaeuble said maturities on Greek bonds should be extended by seven years to give the debt-wracked nation time to overhaul its economy.

In Dallara’s view, Greece’s next rescue package is more likely to succeed if it includes a plan to retire outstanding debt through organized buybacks.

A buyback fund of about 50 billion euros, for example, could reduce Greece’s outstanding debt as a proportion of gross domestic product by as much as 20 percent, Dallara said by phone yesterday. He spoke en route to Paris, where he will meet with about 20 banks and insurance companies today to discuss the role of bondholders in the new package.

Buybacks Rejected

European authorities ruled out using bailout funds to retire Greek debt in March, a blow to Trichet, who pushed to give the EU’s 440 billion-euro rescue facility the power to buy debt in the open market and to finance buybacks. One year after the 110 billion-euro bailout that aimed to end the region’s debt crisis, Greece is in danger of defaulting without a new rescue package.

Dallara, 62, said a buyback would work best if frontloaded because debt could be bought more cheaply and on a large enough scale to bolster market confidence. Such a program could use a market-related pricing mechanism and target a range of maturities, he said. A Greek buyback agency might operate alongside the IMF program, which could fund the effort or otherwise reassure creditors, he said.

‘Manageable Profile’

“Put that together with the primary surpluses which Greece intends to run from 2014 on, and you begin to see a much more manageable profile of the stock of Greek debt from around 2016 onward,” Dallara said.

Greek government debt will rise to 158 percent of GDP this year from 143 percent in 2010, according to EU forecasts.

Financial companies held informal meetings in Paris yesterday to prepare for today’s IIF talks. Deutsche Bank Chief Executive Officer Josef Ackermann, who also chairs the IIF, joined Schaeuble in Berlin on June 30 to announce an agreement by the country’s banks and insurers to roll over Greek debt holdings.

Greek banks are willing to roll over their government bonds as part of an EU rescue plan that will keep the country out of financial markets for three years, Finance Minister Evangelos Venizelos said in an interview with Bloomberg Television in Athens yesterday. He also said Greece must avoid having rating companies cut the country to “selective default.”

Greek banks are participating in the debt reduction talks, Dallara said.

“We understand their concerns,” Dallara said. “Obviously we need to be quite sensitive to their concerns in light of the essential requirement of sustaining ECB funding to them.”

--Editors: Frank Connelly, James Hertling

To contact the reporters on this story: Rebecca Christie in Brussels at; Rainer Buergin in Berlin at

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

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