Tuesday, June 28, 2011

Greek Debt Talks Widen

Greek Debt Talks Widen

By STEPHEN FIDLER in Brussels, DAVID GAUTHIER-VILLARS in Paris and ALESSANDRA GALLONI in Rome

Talks about how to get private investors to contribute toward a new bailout for Greece widened Monday to include a possible buyback of Greek government bonds—but people at a meeting in Rome discussing the issue said there were no guarantees the ideas wouldn't lead to a default by the heavily indebted nation.

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European Pressphoto Agency

People from the Communist union PAME protest on the Acropolis hill in Athens on Monday.
.The Rome meeting was the first gathering of Greece's official and private creditors, together with Greek government officials, since the country's debt crisis began more than 18 months ago. Greece was promised €110 billion ($156.08 billion) in aid last year from the International Monetary Fund and European Union, the first of three bailouts to euro-zone nations. But that money won't be enough to finance it until mid-2013 as originally planned.

The efforts to get a meaningful private-sector contribution to a fresh bailout, as demanded by Germany and other euro-zone governments, face a tight deadline.

Finance ministers from the rest of the 17-nation euro zone are to discuss a new Greek rescue on Sunday—assuming the Greek parliament agrees to a package of austerity measures this week. Governments are trying to reduce the amount they need to lend to Greece by seeking a framework of how to prevent investors in Greek government bonds just cashing bonds as they come due.

People familiar with the discussions said the meeting's main focus was provided by an "umbrella proposal" by French banks to reinvest 50% of Greek government bonds that mature in the next three years into new 30-year bonds. A further 20% would be set aside to provide guarantees of ultimate repayment—and holders of the bonds would expect to benefit from higher returns if Greece's economy performs well.

The assets would be managed by what is known as a special-purpose vehicle, which would let investors remove the bonds from their balance sheets.

WSJ's Stephen Fidler has the details behind France's plan to reinvest proceeds from Greek government bonds in an effort to keep bondholders from rushing for the exits. Photo: REUTERS/John Kolesidis
.French President Nicolas Sarkozy backed the plan Monday, saying it "makes for a system which is, without a doubt, interesting for all countries."

He told a press conference in Paris: "The idea is that we won't let down Greece and that we'll defend the euro, which is in the interest of us all."

The French government is seeking the participation of private investment funds in the plan to get near the target of rolling over at least €30 billion of the €64 billion in Greek government bonds that come due in the next three years. It's not clear how it will be achieved.

According to people familiar with the matter, European Central Bank officials are receptive to the French proposal, assuming private-sector participation is voluntary.

The ECB has taken a hard-line public stance against any private-sector participation that would result in a default rating for Greece.

Under the Umbrella
French banks proposed:

Bondholders reinvest 50% of proceeds from maturing Greek bonds in new 30-year bonds.
Bondholders also set aside 20% of proceeds to buy top-rated zero-coupon bonds to guarantee capital repayment.
If the Greek economy grows faster than expected, investors get higher yield.
Special-purpose vehicle, controlled by the private creditors, would manage assets, allowing investors to remove Greek assets from their balance sheets.
Source: WSJ Research
."The situation can arise when private-sector involvement in [the next Greek bailout] is characterized by ratings agencies as selective default," Jürgen Stark, a hawkish German board member, said in a speech in Hamburg on Monday.

He said that under such circumstances, the ECB couldn't accept Greek bonds as collateral, a move that would create a crisis for Greek banks dependent on ECB liquidity.

However, officials appear open to an arrangement whereby banks would voluntarily agree to purchase new Greek debt when existing bonds mature, suggesting that a compromise along the lines of what France is proposing may be acceptable to the ECB.

The French plan wasn't the only one under discussion, and some said it needed adjustment, including the possibility that rolling guarantees should be provided for a year or two of interest payments.

One participant said it and related proposals were like "a self-financing Brady Plan," referring to the late-1980s initiative to dig Latin America out of its debt crisis. Under the original idea, the borrowing governments financed guarantees. Under the French plan, that's being done by the creditors.

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.People involved in the Rome discussions says there is no guarantee that the proposals under discussion wouldn't trigger a default call by the rating firms, which are looking for signs of creditors getting a raw deal, even if they enter into it voluntarily.

"There isn't a recipe that guarantees anything. We're skating on thin ice," said a person familiar with the discussions. "What we're trying to do is minimize the risks."

Rating firms aren't part of the discussions, reflecting their sensitivity to criticism that they got too involved in structuring toxic financial products that worsened to 2008 financial crisis.

The talks also included proposals to buy longer-dated Greek bonds in the market at a discount to face value, said a second person at the meeting.

This idea, unlike others presented at the meeting, would reduce the amount of Greek debt outstanding, and could possibly be financed by funds from European governments, the IMF or from the sale of businesses and other assets owned by the Greek government.

Some in the meeting argued that buyback proposal "had the potential to change market dynamics for Greece" by cutting its debt burden, according to the second person at the meeting.

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Previous Debt Exchanges Point to Solution for Greece Access thousands of business sources not available on the free web. Learn More As expected, no decisions were made and none of the proposals that emerged has been officially endorsed, that person said. Technical teams will continue to work on proposals.

The process of finding a solution is made much more complicated by different national accounting rules and rulings on loan impairments, and also—in the case of banks—whether the bonds are held to maturity, available for sale or in their trading books.

The meeting was chaired by Vittorio Grilli, director general of the Italian Treasury and chairman of a top European Union committee involved in the Greek discussions, and was held under the auspices of the Institute of International Finance, a Washington-based group of more than 400 banks and financial institutions. Its managing director, Charles Dallara, said in a statement afterwards that participants "engaged in a constructive exchange of views on Greece and progress was made in advancing the discussions."

Participants included representatives of Deutsche Bank AG and Commerzbank AG of Germany, as well as French banks Société Générale SA, BNP Paribas SA and Crédit Agricole SA. German banks hold more Greek sovereign debt than banks from any country outside Greece, but the French have more overall exposure to Greek debt because two of them own Greek banks.

Also represented at the IIF meeting were HSBC Holdings PLC, J.P. Morgan Chase & Co., Barclays PLC and Intesa Sanpaolo SpA, among others.

—Brian Blackstone
in Frankfurt
contributed to this article.
Write to Stephen Fidler at stephen.fidler@wsj.com and Alessandra Galloni at alessandra.galloni@wsj.com

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