Germany has put a Greek bond swapback on the table as a model for private sector involvement in fresh aid for Athens, Deputy Finance Minister Joerg Asmussen told Reuters Insider TV on Wednesday.
"The model put forward by some French banks is still a good base for discussions and we are currently working on this," Asmussen said in the interview, referring to a French proposal to roll over Greek debt.
"But since rating agencies have signaled that they will consider modalities (such as) the French proposal as a selective default -- that means a rating event -- we can also put other options like a bond exchange on the table," he said, adding discussions would take place over the summer break.
Finance Minister Wolfgang Schaeuble wrote to his euro zone colleagues, the European Central Bank and International Monetary Fund last month demanding that banks holding Greek bonds swap their bonds for new ones with maturities seven years longer.
But rating agencies signaled then that such a step would amount to a rating event and the ECB, European Commission and France pushed for a softer solution involving a voluntary debt rollover, prompting Germany not to insist on its bond swap idea.
FRENCH INCENTIVES "TOO CLEAR"
Asmussen said the French model may set "too clear" incentives for private creditors to participate.
"The model certainly has advantages in the sense that it gives clear incentives for financial market participants to contribute voluntarily. But the question is: are the incentives maybe too generous?" he said.
Work was being done to modify the proposal, especially with a view to cutting the interest rate Greece would pay on its debt, but other options including the bond swap would also be considered.
"First, one has to look how can one modify the French proposal in a way that it is still attractive to financial institutions," Asmussen said.
"But one element one needs to look at is the interest rate that Greece has to pay because the higher the interest rate, the more negative it is for the debt sustainability situation of the country," he added.
Germany's revival of the discussion on a bond swap could pit Berlin against other European governments that have argued instead for a rollover that would give private creditors greater incentives to participate.
A German banking source said banks were not impressed with the move and that this model's potential lack of guarantees may lead to high write-offs for banks.
"One does wonder why the agreements from last week suddenly don't count anymore," the banking source said.
Germany's financial sector agreed in principle last week to contribute to a fresh Greek rescue. Since then, Standard & Poor's dealt a blow to the French bank model by warning it would treat the plan as a default.
If a "rating event" -- a debt downgrade to selective default -- is not avoidable, it should be limited to a short period of time, Asmussen said.
"Then the question is 'can we limit the period of this rating event to a very short period of time?'. This is the key: what can we do to limit this period to probably a few weeks or even days?" Asmussen said.
German Chancellor Angela Merkel said on Tuesday that Greece's international lenders should not lose the ability to make their own judgments in the face of rating agency warnings.
Asmussen added that while the volume of outstanding Greek credit default swaps (CDS) was limited -- at around 4-5 billion euros -- it still bore a systemic risk.
"It's somehow unclear because of a lack of statistics who holds these CDS ... so there is a limited but not negligible systemic risk here and that is why in any case, if we pursue private sector involvement, we are going to avoid a credit event," Asmussen told Reuters. A "credit event" would in theory trigger payments on credit default swaps.
A day after ratings agency Moody's cut Portugal's credit rating to junk and cast doubt on Europe's efforts to rescue distressed euro zone states, Asmussen said it was premature to discuss a second rescue package for Lisbon.
"It is absolutely premature to talk about a second program for Portugal. The program has just started," he said.
"We are confident they are willing and able to implement the first package to get back on track," he added.
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