European officials readying Greece’s second bailout in two years are preparing to ask investors to reinvest in new debt when existing bonds mature, overcoming central bankers’ objections to any restructuring.
European Central Bank policy makers are considering options encouraging bondholders to roll over Greek debt as part of a solution to the fiscal crisis, said two officials familiar with the situation. Investors may be given preferred status, higher coupon payments or collateral, said two other officials, who declined to be identified because the talks are in progress.
European leaders are trying to prevent the euro area’s first sovereign default. Last year’s 110 billion-euro ($159 billion) rescue failed to prevent an investor exodus from Greece, saddled with Europe’s highest debt load amid a three- year economic slump. While one official said the ECB’s Executive Board is still opposed to any extension of Greek maturities, a so-called rollover would skirt a technical default.
Greece was due to return to financial markets and sell about 30 billion euros of bonds next year. With its 10-year bonds yielding 16.1 percent, more than twice that at the time of the bailout, the European Union has indicated that Greece will need more aid to plug its financing gap.
Encouraging investors to reinvent in new debt “would dramatically reduce the rollover funding that Greece has to find,” said Klaus Baader, an economist at Societe Generale. “Any additional support package in the period 2012-2013 would then be very small as just the deficit would need to be funded. It mainly buys time, as it doesn’t change the main requirement for Greece to consolidate its public sector finances.”
The details of any new Greek aid package have yet to be agreed on. Euro region finance ministers may meet as early as next week, with final decisions due at a summit of government leaders on June 23-24. Greece’s additional needs may be known as early as tomorrow, as European and International Monetary Fund officials complete work on an assessment of its public accounts.
For months, a maturity extension was taboo, as Europe counted on a mix of budget cuts and official loans to put the country’s finances on track and stop the debt crisis at its source.
Greece has since given up plans to go back to bond markets, offering deeper deficit cuts and the sale of state assets in exchange for follow-up loans to prevent a default.
ECB officials from the euro region’s two largest economies have repeatedly voiced their opposition to restructuring Greece’s debt because they fear it could spark turmoil in the banking system. France’s Christian Noyer says such a step could lead to a “horror story.” Bundesbank President Jens Weidmann said the ECB may stop accepting Greek debt as collateral if any plan to extend maturities went ahead.
At the same time, the Frankfurt-based ECB’s own rules are less clear, and only say that such a step “may be warranted” if officials deem it necessary.
ECB Executive Board Member Juergen Stark, one of the strongest opponents of any extension of bond maturities, told Il Sole 24-Ore newspaper in an interview published today that a rollover would not be considered a default and could be an acceptable way of involving private investors in aiding Greece.
“The ECB is saying that they would eventually favor a Greek rollover plan, which by that they mean that they will ask banks to keep the exposure to the country’s banks constant,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London. “It would give some breathing space.”
EU Economic and Monetary Commissioner Olli Rehn said in New York yesterday that officials are studying “the feasibility of voluntarily rescheduling, which would not create a credit event. Debt restructuring is not on the table.”
Greece’s fate hinges on the stance taken by Chancellor Angela Merkel of Germany, the country that designed the euro in its image and as Europe’s largest economy is the biggest underwriter of bailouts.
Germany has a “clear expectation” that private creditors will bear some costs of Greece’s follow-up package, Finance Ministry spokesman Martin Kotthaus said in Berlin today.
Greece’s debt is likely to mushroom to 157.7 percent of gross domestic product in 2011, the highest in euro history, the European Commission said May 13. It predicted a 3.5 percent economic contraction, shedding doubts on whether Greece will generate the tax revenue to pay off its debts.
European calls for austerity have sparked political warfare in Greece, with opposition parties rejecting Prime Minister George Papandreou’s proposals on May 27. The biggest opposition party, New Democracy, objects to the “policy mix” and not to the principle of saving money, said Notis Mitarachi, the party’s alternate head of economic policy.
Europe’s financial leaders need to hammer out a revised Greek package by the end of June, in time to persuade the IMF to pay out its share of the next tranche of loans.
The Washington-based lender provided 30 billion euros of Greece’s original loans, along with a third of the loans since granted to Ireland and Portugal as the spreading crisis threatened the integrity of the euro.
European financial officials are also mulling so-called negative incentives such as cutting off old Greek bonds from eligibility for use as collateral with the ECB while granting that privilege to new bonds, the people familiar with the situation said.
Policy makers’ efforts echo 2009’s so-called Vienna Initiative that leaned on creditors in eastern Europe to roll over expiring bonds, the people said.
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