European governments summoned banks and insurers to urgent meetings on Wednesday, pressing them to share the cost of a second Greek bailout with taxpayers and avoid a market meltdown.
Germany invited private creditors to a meeting, a letter seen by Reuters showed, to discuss their voluntary support for the debt-struck country. Other euro zone countries, including France and the Netherlands, held similar discussions.
"Bondholders should play a substantial role in averting a Greek insolvency ... we're inviting you to a meeting to discuss all options of a concrete contribution," the letter sent from the German Finance Ministry said.
The rollover of a bond at the time it matures is one possibility banks could agree to, the letter said.
And France also began talks with representatives from the financial industry about the plan, a source familiar with the situation said, adding that efforts were being coordinated on a pan-European level.
Euro zone governments are discussing a second bailout package for Greece that would run from 2011 to 2014 and could amount to 120 billion euros ($172 billion), including up to 30 billion euros from the private sector.
There is rising pressure in countries like Germany, Finland and the Netherlands for aggressive steps to force banks to share the burden of a new aid package, after taxpayers coughed up all of the money in the previous round.
"The process will be voluntary, but it is clear that all the financial institutions have an interest in the stability of the euro zone and Greece," a French government source said, speaking on the condition of anonymity.
The Dutch Ministry of Finance was talking on Wednesday with the country's banks, insurers and pension funds about the extension of debt to Greece, a source familiar with the matter said. The source declined to give further details.
But any suggestion that governments are forcing the banks to pay could be viewed by credit rating agencies as effectively a Greek default or restructuring. That could trigger further catastrophic debt downgrades.
German chancellor Angela Merkel last week softened her tough position on the banks in a meeting with French President Nicolas Sarkozy, and the two agreed that any private sector support should be purely voluntary.
SHADES OF VOLUNTARY
In exchange for their support, German lenders have now demanded "additional incentives" in the form of state guarantees, and the talks will in all likelihood focus on the details of how to make this work.
"It's a matter of semantics. What the EU finance ministers want to avoid is a mandatory rollover because of the implications that might have for Greece's ratings," said Simon Adamson, a senior analyst at Creditsights.
"It has to be voluntary, but there are different shades of voluntary," he said, adding that banks in many countries were in a weak position to negotiate after receiving billions of euros in state support at the peak of the credit crisis.
Private investors are estimated to hold some two-thirds of Greece's approximately 270 billion euros of sovereign bonds. Roughly 90 billion euros of that is held by insurance companies, pension funds and investors such as hedge funds.
Banks in Germany themselves have quantified their exposure at between 10 billion euros and 20 billion euros, while insurers estimate their holdings at 6 billion euros, just a fraction of their total invested assets. .
Even if Greece defaulted, the impairment charges for banks might not be devastating, some analysts say. However, a Greek default would send markets into a tailspin and spark fears countries such as Spain and Italy are next in line.
Companies including the Gulf's Dubai World, which rescheduled its $25 billion debt pile last year, forced outliers to comply through a deal that applied to all if a certain threshold of creditors agreed to it.
But such tactics to coerce bondholders into agreeing a deal normally used in a debt restructuring cannot now be used. Under the current plans, bondholders will be asked to agree to renew any paper they hold when it expires.
And the terms have yet to be decided.
"There is still no proposal. It's a very tough evaluation to make," Corrado Passera, chief executive of Italy's biggest retail bank, Intesa Sanpaolo, told reporters.
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