Support is building among senior European finance officials for a plan to press Greece's private-sector creditors into accepting a debt exchange that would result in delayed repayment to them, people familiar with the matter say.
But that aggressive course of action—which would probably trigger the euro zone's first-ever debt default—faces opposition from the European Central Bank, which would have to be a key player in the plan, and it will face tough battles at a series of meetings of politicians this month.
The latest plan was discussed at a meeting of euro-zone finance-ministry officials in Vienna last week, and senior euro-zone officials said Saturday that there was a tentative agreement to give Greece more financing—and that aid would likely come on condition that private-sector creditors bear some of the burden.
The Vienna meeting gathered the top civil servants in European finance ministries. They are central behind-the-scenes players, but it is their bosses and European leaders who will fight the political battles and make the final call.
The governments have concluded that Greece, propped up last year with a €110 billion ($161 billion) loan package, will need more cash as soon as next spring. The debt-exchange proposal, championed by Germany and with the strong support of several other euro-zone nations, would ease Greece's cash crunch—and also lessen the amount of extra money Germany and others must quickly put up, senior euro-zone officials say.
Under the plan proposed in Vienna, the 17 euro-zone governments would ask Greece's creditors to exchange their soon-to-mature debt for debt with a longer maturity, a process that could begin as early as July if finance ministers approve the new Greek aid package at their meeting June 20, officials said.
A German finance ministry paper, reported this weekend in German newspaper Die Welt and confirmed by a euro-zone official, proposes a seven-year extension on maturing debt.
The officials in Vienna said there is hope that the debt-exchange offer could delay around €30 billion of Greece's repayments over three years—in effect, partially offsetting the extra rescue money.
The bailout of Greece is deeply unpopular in Germany and other more fiscally sound countries, and policy makers have labored for months on a path that would keep Greece afloat but would be palatable to publics and parliaments.
Plunging Greece into default—even briefly—is a difficult step, and the plan would be subject to approval by finance ministers, and ultimately by national leaders themselves at a summit later this month. France, for instance, has been wary of burning private creditors, and even German officials admit the deal would be difficult to push through. And it will take strong inducements to cajole creditors into accepting an exchange. (Officials say they are confident that even if a debt exchange is seen as a default by credit-rating agencies, they can structure it to avoid being a "credit event" that would trigger credit-default swap contracts.)
The biggest hurdle will be the ECB, which has been staunchly and publicly opposed to hurting banks and other creditors, for fear that big losses on Greek debt could catalyze a banking crisis. A senior German official said last week that if the ECB vetoes a maturity extension, governments will have little choice but to lend Greece money with scant or no immediate private-creditor involvement.
Greece has a large slug of long-term debt—more than €14 billion—coming due next March. Tens of billions of euros more will mature in coming years.
That maturing debt and Greece's persistent budget deficits have left the country in a hole. The €110 billion assembled by euro-zone countries and the International Monetary Fund last May only partly covers Greece's needs in 2012 and 2013. The rescuers assumed Greece would be able to raise long-term debt in the markets next year; now, that is seen as nearly impossible.
Thus, under the plan, governments would give Greece new lending, to be provided by the European Financial Stability Facility, the euro zone's sovereign rescue fund, officials said.
The EU and the IMF in February estimated that Greece would need €44 billion in long-term financing from the start of 2012 through the first half of 2013.
The euro-zone officials wouldn't discuss precisely how much new financing could be provided by the EFSF and the IMF.
To make a debt exchange work, creditors will have to be persuaded to accept the new terms—not an easy task.
There are several options on the table. A key option, the officials said, is to have only the new Greek bonds accepted by the ECB as collateral for lending; the old ones would be refused. That would, of course, require the ECB to go along. The central bank is independent of the euro-zone governments.
The structure of the proposed debt exchange suggests it is very likely to be considered a default by Standard & Poor's, which explained its methodology in a report Friday. The ratings firm said that for issuers rated at Greece's level, single-B, a "voluntary" debt exchange would likely be default if creditors received securities with terms less favorable than are available in the secondary market. Ten-year Greek debt yields 15% in the secondary market, and two-year debt yields over 20%.
Officials say the exchanged debt won't be that favorable.
http://online.wsj.com/article/SB10001424052702304474804576367563185441814.html
But that aggressive course of action—which would probably trigger the euro zone's first-ever debt default—faces opposition from the European Central Bank, which would have to be a key player in the plan, and it will face tough battles at a series of meetings of politicians this month.
The latest plan was discussed at a meeting of euro-zone finance-ministry officials in Vienna last week, and senior euro-zone officials said Saturday that there was a tentative agreement to give Greece more financing—and that aid would likely come on condition that private-sector creditors bear some of the burden.
The Vienna meeting gathered the top civil servants in European finance ministries. They are central behind-the-scenes players, but it is their bosses and European leaders who will fight the political battles and make the final call.
The governments have concluded that Greece, propped up last year with a €110 billion ($161 billion) loan package, will need more cash as soon as next spring. The debt-exchange proposal, championed by Germany and with the strong support of several other euro-zone nations, would ease Greece's cash crunch—and also lessen the amount of extra money Germany and others must quickly put up, senior euro-zone officials say.
Under the plan proposed in Vienna, the 17 euro-zone governments would ask Greece's creditors to exchange their soon-to-mature debt for debt with a longer maturity, a process that could begin as early as July if finance ministers approve the new Greek aid package at their meeting June 20, officials said.
A German finance ministry paper, reported this weekend in German newspaper Die Welt and confirmed by a euro-zone official, proposes a seven-year extension on maturing debt.
The officials in Vienna said there is hope that the debt-exchange offer could delay around €30 billion of Greece's repayments over three years—in effect, partially offsetting the extra rescue money.
The bailout of Greece is deeply unpopular in Germany and other more fiscally sound countries, and policy makers have labored for months on a path that would keep Greece afloat but would be palatable to publics and parliaments.
Plunging Greece into default—even briefly—is a difficult step, and the plan would be subject to approval by finance ministers, and ultimately by national leaders themselves at a summit later this month. France, for instance, has been wary of burning private creditors, and even German officials admit the deal would be difficult to push through. And it will take strong inducements to cajole creditors into accepting an exchange. (Officials say they are confident that even if a debt exchange is seen as a default by credit-rating agencies, they can structure it to avoid being a "credit event" that would trigger credit-default swap contracts.)
The biggest hurdle will be the ECB, which has been staunchly and publicly opposed to hurting banks and other creditors, for fear that big losses on Greek debt could catalyze a banking crisis. A senior German official said last week that if the ECB vetoes a maturity extension, governments will have little choice but to lend Greece money with scant or no immediate private-creditor involvement.
Greece has a large slug of long-term debt—more than €14 billion—coming due next March. Tens of billions of euros more will mature in coming years.
That maturing debt and Greece's persistent budget deficits have left the country in a hole. The €110 billion assembled by euro-zone countries and the International Monetary Fund last May only partly covers Greece's needs in 2012 and 2013. The rescuers assumed Greece would be able to raise long-term debt in the markets next year; now, that is seen as nearly impossible.
Thus, under the plan, governments would give Greece new lending, to be provided by the European Financial Stability Facility, the euro zone's sovereign rescue fund, officials said.
The EU and the IMF in February estimated that Greece would need €44 billion in long-term financing from the start of 2012 through the first half of 2013.
The euro-zone officials wouldn't discuss precisely how much new financing could be provided by the EFSF and the IMF.
To make a debt exchange work, creditors will have to be persuaded to accept the new terms—not an easy task.
There are several options on the table. A key option, the officials said, is to have only the new Greek bonds accepted by the ECB as collateral for lending; the old ones would be refused. That would, of course, require the ECB to go along. The central bank is independent of the euro-zone governments.
The structure of the proposed debt exchange suggests it is very likely to be considered a default by Standard & Poor's, which explained its methodology in a report Friday. The ratings firm said that for issuers rated at Greece's level, single-B, a "voluntary" debt exchange would likely be default if creditors received securities with terms less favorable than are available in the secondary market. Ten-year Greek debt yields 15% in the secondary market, and two-year debt yields over 20%.
Officials say the exchanged debt won't be that favorable.
http://online.wsj.com/article/SB10001424052702304474804576367563185441814.html
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