Germany calls for Greek bond swap to gain time

AP News
Posted: Jun 08, 2011 4:34 PM
Germany calls for Greek bond swap to gain time

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

In a letter to top officials dealing with the debt crisis and obtained by The Associated Press Wednesday, Wolfgang Schaeuble proposed a swap that would extend debt repayments by seven years and give Athens more time to reform its economy.

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 _ so far spared losses as the eurozone countries have bailed out Greece, Ireland and Portugal _ would have to make a "quantified and substantial contribution" to the new aid package being discussed by eurozone governments and the International Monetary Fund.

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. 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, Schaeuble said any deal June 20 "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 does what it considers a restructuring of 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 euro110 billion ($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 banks and investment funds are wary of buying bonds from the country, which remains stuck in recession and is struggling to cut its large budget deficit. Some of the richer nations object to putting up more money without getting private creditors to share part of the 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 but that 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.


Steinhauser contributed from Brussels