Bloomberg News

Germany Wants Greek Bond Swap Considered, Official Says

July 06, 2011

(Updates with Schaeuble comment in fourth paragraph, Dallara comment in eighth paragraph.)

July 6 (Bloomberg) -- Germany revived a proposal for a Greek bond swap that would involve a voluntary exchange of debt against bonds with a longer maturity, as officials struggle to devise a role for creditors in a bailout of Greece.

Discussions on a bond swap have become possible again after rating companies indicated that a French model to roll over debt would create a so-called rating event, a German official said by phone in Berlin today on condition of anonymity because negotiations are private. While a bond swap might create a rating event, the German government sees it as limited to a very short time, the official said.

The German move breathes fresh life into a proposal outlined by Finance Minister Wolfgang Schaeuble in a June 6 letter addressed to European Central Bank President Jean-Claude Trichet, the International Monetary Fund’s then-acting chief, John Lipsky, and fellow euro-area finance ministers. In it, Schaeuble said maturities should be extended by seven years to give the debt-wracked nation time to overhaul its economy.

Schaeuble told reporters in Berlin today he sees “many arguments in favor of alternatives” to the French proposal after it became clear that the plan was fraught with problems. The alternatives will be discussed through September, he said.

Resurrecting the plan risks setting Chancellor Angela Merkel’s government back on a collision course with Trichet as Merkel and Schaeuble strive to fulfill a commitment to enroll banks in aid for Greece. Trichet said last month that pushing private-sector involvement would be an “enormous mistake” for the euro region.

Schaeuble, Steinbrueck

Schaeuble, in a speech in Berlin last night, said that he agreed “100 percent” with his predecessor in Merkel’s first- term government, Peer Steinbrueck, who said when he was still in office that all political decisions should be taken in agreement with the ECB.

About 20 banks and insurance companies met in Paris today to discuss the role of bondholders in a new Greek aid plan, said the Institute of International Finance, a banking-lobby group that hosted the gathering. Talks began last week in Rome under the auspices of IIF Managing Director Charles Dallara, a former U.S. Treasury official.

“I don’t think that a temporary period of selective default as it has been narrowly framed for sovereigns in the past is necessarily the worst thing that could happen here,” Dallara told Bloomberg Television today. “What’s most important is that if there is a judgment of selective default, that it happens within a framework of something the markets can see as a broader solution and that it’s a rather temporary period.”

German Banks

German banks and insurers including Deutsche Bank AG and Allianz SE agreed in principle last week to contribute to a debt rollover for Greece based on the French model that aims to contribute a total of about 30 billion euros ($43 billion) to the second Greek bailout.

That plan was thrown into disarray on July 4 when Standard & Poor’s said the debt rollover might temporarily place the country in “selective default.”

Even so, a declaration of selective default may cause limited harm as long as the ECB keeps accepting the debt as collateral, HSBC Holdings Plc said the same day.

The S&P view means there is no longer any reason not to discuss the bond swap idea, the German official said.

Merkel warned yesterday against too much weight being placed on the ratings companies, saying that the so-called troika of the IMF, ECB and European Commission mustn’t “surrender our ability to make judgments.”

“I place my trust above all in the assessments of these three institutions,” she told reporters in Berlin yesterday.

--With assistance from Rebecca Christie and Olivia Sterns in Paris. Editors: James Hertling, Jeffrey Donovan

To contact the reporter on this story: Rainer Buergin in Berlin at

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.netor

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