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Tags: EU | Europe | Financial | Crisis

Germany Calls for Greek Bond Swap to Gain Time

Wednesday, 08 June 2011 01:29 PM EDT

Germany's finance minister says private creditors must share the burden of more financial help for struggling Greece in any deal to prevent the country from defaulting on its debts.

In a letter to top officials dealing with the debt crisis, Wolfgang Schaeuble proposed a bond swap that would extend debt repayments by seven years, giving Athens more time to reform its economy and overcome the debt crisis that has been hanging over Europe's currency union for more than a year.

Such a move has previously been strongly opposed by the European Central Bank on the grounds it could spread turmoil through the continent's financial system, while ratings agencies have warned it could be considered a default.

In the letter to Jean-Claude Trichet, the president of the European Central Bank, the International Monetary Fund's acting Managing Director John Lipsky and other top finance officials, Schaeuble said bondholders would have to make a "quantified and substantial contribution" to a new aid package being discussed by eurozone governments and the IMF.

The best way to do that, Schaeuble said, was to swap existing Greek bonds for new bonds that would prolong their maturity by seven years. That could cost private sector bondholders — who have so far been spared losses in the rescues of Greece, Ireland and Portugal — some money as they miss out on other potentially more lucrative investments.

Schaeuble is one of the eurozone finance ministers trying to reach agreement on a new aid package for Greece in time for the next formal meeting on June 20. He said he expected Greece to need a "substantial" increase in aid.

"At the same time, without another disbursement of funds before mid-July, we face the real risk of the first unorderly default within the eurozone," Schaeuble said.

In the letter, obtained Wednesday by The Associated Press, Schaeuble said any deal at the June 20 meeting "has to include a clear mandate — given to Greece possibly together with the IMF — to initiate the process of involving holders of Greek bonds."

"Such a result can best be reached through a bond swap leading to a prolongation of the outstanding Greek sovereign bonds by seven years, at the same time giving Greece the necessary time to fully implement the necessary reforms and regain market confidence," Schaeuble said.

The idea may face opposition from the ECB, which has adamantly opposed any restructuring of Greek debt that would leave bondholders with less than full value. ECB officials have said such a move would inflict losses on shaky Greek banks which the government can ill afford to bail out, and could make it harder for other countries to borrow money on bond markets because investors would fear the possibility of similar steps there.

The ECB has even threatened to bar the use of Greek government bonds as collateral for central bank credit if Greece restructures its debt. That would rock the Greek banking system, which depends on support from the ECB because banks cannot find credit elsewhere.

Greece received a 110 billion euro ($161 billion) international rescue package last year, but is still having trouble coming up with money to pay its debts because it is regarded as too risky to borrow on private bond markets.

Greece risks running out of money next year as its market borrowing rates are prohibitively high and it struggles to cut its debts as it remains stuck in recession. Some of the richer nations object to putting up more money without getting private creditors to share part of the burden.

A number of economists have said Greece's debts, built up over years of overspending, are simply too big to pay and that the country will eventually have to reduce them through a restructuring that sharply reduces the amount of money creditors get back. Delays to debt repayments, while they would buy more time to find solutions, would do little to reduce the overall debt burden.

A spokesman for the EU's Monetary Affairs Commissioner Olli Rehn — one of the recipients of the letter — said Wednesday that no decision on the exact nature of the private sector involvement has been taken yet. He said eurozone officials are currently looking a several options, including asking banks and other financial institutions to keep their lending to Greece at current levels or to extend repayment deadlines for the bonds they hold.

Schaeuble's letter will likely not be a game changer in the debate over Greece's debt, said Juergen Michels, an analyst at Citigroup in London. "I think we have seen the German position several times before," said Michels.

The letter's main purpose may well be to show German parliamentarians that the government is doing its best to get private investors to share the burden and stake out a strong negotiating position, Michels said.

Germany may still back down, ceding to the ECB's vocal warnings on the consequences of a bond swap, Michels said. He added that a voluntary debt rollover, paired with some other concessions, is still the most likely outcome.

"The question is what will be the quid pro quo in this negotiation," he said.

However, Michels also noted Schaeuble is not alone in pushing for more burden sharing from private creditors, with countries like Austria, Finland, the Netherlands, Slovakia and Slovenia likely taking a similar line.

© Copyright 2024 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Germany's finance minister says private creditors must share the burden of more financial help for struggling Greece in any deal to prevent the country from defaulting on its debts. In a letter to top officials dealing with the debt crisis, Wolfgang Schaeuble proposed a...
Wednesday, 08 June 2011 01:29 PM
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