EU to Discuss Greek Plan That Skirts Default Risk

By Tony Czuczka - Jun 19, 2011 7:36 PM GMT+0800


European finance ministers meet today to hammer out a new Greek bailout package watertight enough to avoid triggering a default that German Chancellor Angela Merkel says would be uncontrollable.

Officials must figure out how to design a plan that will encourage investors to roll over expiring Greek debt after Merkel on June 17 ended a standoff with the European Central Bank over restructuring the country’s debt load. Talks start at 6 p.m. in Luxembourg and continue tomorrow. EU leaders meet on June 23-24, where Spanish Prime Minister Jose Luis Rodriguez Zapatero expects a “political commitment” to aid Greece.

“Now comes the tricky part,” said Tullia Bucco, an economist at Unicredit Global Research in Milan. “This proposal is fraught with difficulties in identifying ways to provide banks with incentives to rollover their bonds. Any deterioration in bond conditions via new coupons below market rates would be seen by rating agencies as the trigger of a credit event.”

Stocks, bonds and the euro jumped after Merkel on June 17 ended a feud with the ECB that roiled markets. Highlighting the risks still facing the euro region, Greek Prime Minister George Papandreou must win a parliamentary confidence vote this week that could delay the next austerity round, and Moody’s Investors Service said on June 17 it may cut its Aa2 rating on Italy.
Lehman Experience

Merkel said yesterday in Berlin that policy makers must make sure the Greek crisis doesn’t infect the rest of the euro region and spark a new global financial crisis.

“We all lived through Lehman Brothers,” she told a meeting of activists from her ruling Christian Democrat party. “I don’t want another such threat to emanate from Europe. We wouldn’t be able to control an insolvency.”

Luxembourg Prime Minister Jean-Claude Juncker, who chairs today’s talks, says the ECB must agree on a new Greek plan.

“If we made a move that would be rejected by the ECB, by the rating agencies and therefore the financial markets, we risk setting the euro area aflame,” La Libre Belgique quoted Juncker as saying in an interview published yesterday.

German officials have indicated that a final agreement on Greece may not come until July 11.
Form of Default

The risk is that any accord will still be classified as a form of default by rating companies, effectively cutting Greek banks off from emergency ECB funding. Fitch Ratings said on June 15 that a rollover would prompt it to cut Greece’s sovereign rating to “restricted default.” The bonds themselves would still avoid default and be left at “a low non-investment grade probably in the region of CCC,” it said.

Dutch central bank Governor Nout Wellink told NRC in an interview published yesterday that banks and pension funds may lose money if they contribute on a voluntary basis to another Greek rescue.

Greek debt is graded B+ at Fitch. Standard & Poor’s on June 13 cut its rating on Greece by three levels to CCC, branding it with the world’s lowest debt grade.

EU officials have discussed incentives for investors to reinvest the proceeds of their maturing bonds into new debt, according to people familiar with the situation. They include giving investors preferred status, higher coupon payments or collateral as inducements to buy bonds replacing Greek debt maturing between 2012 and 2014, they said.

The yield on Greece’s two-year bond, which topped 30 percent for the first time on June 16, fell 90 basis points to 28.79 percent the next day. The signs of flexibility from Germany sent the euro up as much as 1 percent to $1.4339.
Zapatero Prediction

Spain’s Zapatero said in St. Petersburg yesterday that he expects investors to contribute voluntarily to a new Greek rescue in a “commonsense” way.

Merkel said on June 17 she is now willing to accept that the so-called Vienna initiative of 2009, which encouraged western banks to continue funding their eastern European units, may be a model for private-investor participation in the new Greek aid package.

That marked a reversal from the position set out by her finance minister, Wolfgang Schaeuble, who had insisted that Greek bond maturities be extended by seven years. The approach met ECB resistance and led to credit-rating company warnings that the move was tantamount to default, stalling efforts to craft an aid package.

ECB President Jean-Claude Trichet said today in Kiel, Germany, that a widening of global imbalances poses challenges for international policy makers. He didn’t speak about Greece.
Cabinet Changes

Officials will be meeting two days after Papandreou announced a Cabinet reshuffle that included replacing Finance Minister George Papaconstantinou in a bid to get rebelling allies to back the 78 billion-euro ($112 billion) austerity plan that the EU and the International Monetary Fund have made a condition for new aid.

Papandreou named Evangelos Venizelos, his defense minister and a former rival for leadership of the ruling Socialist party, to replace Papaconstantinou. He then called for a vote of confidence in his new government that will probably be held the evening of June 21.

Today, Papandreou said he requested the confidence vote to be able to have a stronger hand in talks with the EU. Greece is at a “critical crossroads” and its debt and deficit are a national problem that require national coordination, he said at the beginning of a three-day debate in Athens on the motion.
‘Genuine Problem’

Greece’s inability to return to the markets next year for financing is an “unforeseen threat” and the government is in talks with other EU nations to find a solution for the country’s funding needs, Papandreou said.

“The new government has a duty to complete the talks,” he told lawmakers in comments televised live on state-run Vouli TV. “It is a genuine problem.”

Greek opposition leader Antonis Samaras, leader of New Democracy, the largest opposition party, said he won’t back Papandreou in the confidence vote and demanded early elections.

Merkel is still pushing for private investors to play a “substantial” role in any new package, without specifying what that would look like.

“Let us try to get together a substantial contribution in this participation of private creditors,” she said in Berlin yesterday. “But we don’t do this on the street, we don’t do this in press conferences, we do this in serious talks with those making the contribution.”

European estimates put Greece’s 2012-14 financing gap at as much as 170 billion euros ($243 billion). It would be filled by about 45 billion euros of loans, plus 57 billion euros in unspent aid from the 2010 bailout, roughly 30 billion euros in asset-sale proceeds and about 30 billion euros from creditors.