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Rehn Sees Greek Solution in Bond Rollover, Belgian-Style Cut

June 01, 2011

(Updates Rehn quote in 12th paragraph, Merkel adviser in 19th paragraph.)

June 1 (Bloomberg) -- The European Union’s top economic official said a solution to keeping Greece solvent is combining bold deficit cuts reminiscent of Belgian sacrifices in the 1990s and willingness by lenders to roll over expiring bonds, adapting what was done in Eastern Europe two years ago.

“Belgium is a relevant example” in showing Greece what is “feasible and doable” in primary surplus goals, and the “Vienna initiative has mostly given us positive lessons,” Olli Rehn, the EU’s economic and monetary affairs commissioner, said in an interview yesterday at Bloomberg headquarters in New York. “The basic idea would be that banks maintain their exposure on a voluntary basis.”

Saddled with Europe’s heaviest debt load, Greece is seeking additional loans after last year’s 110 billion-euro ($158 billion) European-led package was insufficient to plug its fiscal hole. Rehn said that while debt restructuring is “off the table” because of the domino effect on European markets, alternatives such as a Vienna-style fix and so-called reprofiling were being considered.

The Vienna-style plan would aim to persuade creditors to buy new bonds from the Greek government when existing ones mature.

Euro Gains

Greek 10-year bonds trade at less than 55 cents on the euro, a sign of investors’ diminishing expectations of being repaid in full. The euro rose to a three-week high against the dollar on optimism officials will agree on further Greek aid, trading at $1.4448 at 9:00 a.m. in London from $1.4396 yesterday. The Stoxx Europe 600 Index lost 0.1 percent.

European politicians have given sometimes conflicting definitions of possibilities such as “restructuring,” “reprofiling,” “soft restructuring” and “default.” French President Nicolas Sarkozy said that if “restructuring” means a failure to pay off debt, “then this word won’t be part of the French vocabulary.”

“It must be frustrating for the so-called market forces” to hear competing voices in the EU, Rehn said. As for policy makers, “we are learning the hard way.”

Rehn suggested yesterday that the Vienna Initiative program, which arrested contagion in Eastern Europe, is one option that is gaining traction.

Vienna Initiative

The Vienna-inspired plan was a key plank in the International Monetary Fund-sponsored rescues of Hungary, Romania, Latvia and Serbia in 2009.

Under the plan, banks including UniCredit SpA and Societe Generale SA, then some of the biggest lenders in Eastern Europe, publicly pledged to keep their units in those countries afloat by rolling over funding and providing fresh capital if needed.

The Vienna plan has drawn less hostile reviews from monetary policy makers than a debt “reprofiling” -- or convincing bondholders to voluntarily accept an extension of maturities.

“We are also examining the feasibility of voluntarily rescheduling, which would not create a credit event,” Rehn said. “Debt restructuring is not on the table, it’s not in the cards, it will not be part of our agenda.”

Rehn, who studied philosophy at Oxford University, said his academic background motivated him to delve into the recent history of some other euro members to find ways out of the crisis.

What Belgium Did

With their sights on the euro in the 1990s, the Belgians had to axe their deficit to qualify for membership in the single currency and tackle their debt burden by undertaking sales of state-owned companies such as telecom monopoly Belgacom SA.

At the time of the 1992 Maastricht Treaty, which laid out the conditions for monetary union, Belgium’s deficit had shot up to a record 8.4 percent of gross domestic product. By the end of 1997, it was under the EU limit of 3 percent of GDP.

Rehn said he was also looking for inspiration in “Banker to the World: Leadership Lessons From the Front Lines of Global Finance” -- the memoir of William Rhodes, former senior vice chairman of Citigroup Inc.

“He has some experience in this,” said Rehn, who bought the book in New York.

European Central Bank officials have said “reprofiling” is tantamount to default and would prompt the Frankfurt-based central bank to refuse to accept Greek bonds as collateral in their emergency funding operations, wiping out the capital of the Greek banking system, the biggest holder of the country’s bonds.

Restructuring ‘Worth it’

The ECB “might have to reconsider” its opposition to Greek debt restructuring, Peter Bofinger, a member of German Chancellor Angela Merkel’s council of economic advisers, said today in an interview on Bloomberg television from Munich.

A restructuring of Greek debt carries risks “but is worth it,” he said.

Asked about the Vienna initiative, ECB Council member Ewald Nowotny said last week that while it was an “interesting model,” it couldn’t be directly adopted in Greece. Executive Board member Jose Manuel Gonzalez-Paramo said such a plan could be “positive” though would only be part of the solution for the indebted nation.

For now, both options are still being considered as inspectors from the EU, the IMF and the ECB wrap up a review of Greece’s progress in meeting the terms of the bailout.

EU Plan

The EU will then formulate its plan for further aid to Greece, which remains shut out of financial markets a year after the rescue package.

Rehn, a 49-year-old Finn, took over Europe’s top economics job from Spain’s Joaquin Almunia in February 2010 as Greece’s debt woes threatened to spread to the rest of the continent. Three months later, EU governments agreed to a record bailout for Greece, and a year into the job, Rehn said, “I would have felt irresponsible if I had let Greece fall.”

Under the terms of the rescue package, Greece was due to return to financial markets and sell about 30 billion euros of bonds next year. With its 10-year bonds yielding 16.4 percent, more than twice that of the time of the bailout, the EU has indicated that Greece will need more aid to plug its financing gap. The IMF has threatened to withhold its share of the payments until the EU explains how Greece will be funded.

Review Concluding

“We are seeing the Greek situation, by and large, eye-to- eye with the IMF,” Rehn said. “We trust we will together draw a joint conclusion of the quarterly review in the coming days.”

The EU and the IMF will have to put up an additional 30 billion euros in loans to tide Greece over next year, with the rest of its 2012-2013 financing needs covered by revenue from asset sales and other measures, the Financial Times reported two days ago, citing ECB Executive Board member Lorenzo Bini Smaghi.

Greek Prime Minister George Papandreou has announced an additional 6 billion euros of budget cuts for this year to meet the bailout goal of shrinking the deficit to 7.5 percent of gross domestic product. The government also pledged to speed 50 billion euros of asset sales, mostly real estate, to pay down debt, which is set to reach almost 160 percent of GDP this year, the highest in the euro’s history.

The EU and the IMF have called on Papandreou to secure multiparty support for the measures, which are part of a broader four-year austerity package. The country’s main opposition parties rejected the plan in a meeting with Papandreou on May 27.

‘Credibility Test’

For Greece, time and patience are running out.

“Greece will have to stop living beyond its means,” Rehn said. “This is a real credibility test for both government and opposition. We need everyone to do their part.”

Rehn said he half-agreed with Jacques Delors, former president of the European Commission and one of the founding fathers of the euro, who said last year that now that the firefighters have done their job, it was the turn of the architects.

“We still have to, unfortunately, continue firefighting for quite some time, probably,” said Rehn, adding he was aware of criticism that the EU “takes decisions slowly and is behind the curve.”

Asked what gave him hope that he and other current European leaders would find a solution to their problems, Rehn said it was the success of an earlier generation in forging a united continent after the divisions of the Cold War.

He recalled growing up in Finland, neutral in the East-West struggle, and realizing the moment when he felt that his country had truly joined Europe: the day in 1966 his father brought home an Opel auto made in West Germany after owning several Eastern European cars.

“I remember that moment very well. It was a good memory,” Rehn said.

--With assistance from Helene Fouquet in Paris, Bei Hu in Hong Kong, Sree Bhaktavatsalam in Boston and Boris Groendahl in Vienna. Editors: Kevin Costelloe, Leslie Hoffecker

To contact the reporters on this story: Flavia Krause-Jackson in New York at; Sara Eisen in New York at

To contact the editors responsible for this story: Chris Wellisz at; Mark Silva at

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