EU Signals Bigger Losses on Greek Bailout
European governments dropped clues
that bondholders may have to take bigger losses on Greek debt in
a second aid package, as Greece’s deteriorating economic outlook
forces bolder steps to quell the fiscal crisis.
Finance ministers considered reshaping a July deal that
foresaw investors contributing 50 billion euros ($66 billion) to
a 159 billion-euro rescue. That “private sector involvement”
includes debt exchanges and rollovers.
“As far as PSI is concerned, we have to take into account
that we have experienced changes since the decision we have
taken on July 21,” Luxembourg Prime Minister Jean-Claude Juncker told reporters early today after chairing a meeting of
euro finance chiefs in Luxembourg. “These are technical
revisions we are discussing.”
Together with plans to get more firepower out of the 440
billion-euro rescue fund, the review of Greece’s aid package was
a response to growing international frustration with Europe’s
inability to get to grips with the crisis after 18 months of
incremental steps.
Juncker gave no details about a possible recalibration of
the debt exchange. The talks came after seven countries
including Germany, Europe’s dominant economy, weighed calling
for Greek bond writedowns of as much as 50 percent, two European
officials said.
Decision Postponed
The ministers also pushed back a decision on the release of
Greece’s next 8 billion-euro loan installment until after Oct.
13. It was the second postponement of a vote originally slated
for yesterday as part of the 110 billion-euro lifeline granted
to Greece last year.
“The endgame for Greece has now begun,” Sony Kapoor,
managing director of policy group Re-Define Europe, said in an
e-mailed note. “It seems that the ground is being laid to
revisit the private sector involvement agreement reached in
July.”
European stocks and the euro fell yesterday and investors
shunned riskier countries’ bonds amid concern that the crisis is
careening out of control. Europe’s financial leaders are
fighting on multiple fronts, trying to repair Greece’s economy
while insulating Italy and Spain and shoring up banks that the
International Monetary Fund says face as much as 300 billion
euros in credit risks.
Greek Review
Scrounging for savings, the Greek cabinet on Oct. 2
announced 6.6 billion euros of cuts, mostly by slashing public
payrolls. Greece will “very likely” have to make extra
reductions for 2013 and 2014, a two-year phase that will be the
focus of the rest of the review by European Union, European
Central Bank and IMF officials, EU Economic and Monetary
Commissioner Olli Rehn said.
Greece’s revised 2011 deficit goal may be 8.5 percent of
gross domestic product compared with a previous target of 7.6
percent, Rehn said. He called the new target “plausible” and
lauded Greece’s “important steps” toward further savings next
year.
While an Oct. 13 meeting to decide on the next payout was
canceled, Juncker said he is “nevertheless optimistic when it
comes to the issue of the disbursement.” The decision now
dovetails with an Oct. 17-18 summit of European government
leaders to address the crisis.
“Greece is not the scapegoat of the euro zone,” Greek
Finance Minister Evangelos Venizelos said. “Greece is a country
with structural difficulties.”
Fund Firepower
Finance ministers held a first discussion over how to
further beef up the rescue fund, setting aside a plea by German
Finance Minister Wolfgang Schaeuble to postpone that debate
until the remaining countries have endorsed the fund’s latest
upgrade.
Fourteen of the 17 euro countries have approved the
reinforcement, which will empower the European Financial
Stability Facility to buy bonds on the primary and secondary
markets, offer precautionary credit lines and enable capital
infusions for banks.
Juncker announced “good progress” on the credit lines and
bank-recapitalization tools. Avoiding the word “leveraging,”
he said work is under way to scale up the fund’s capacity
without requiring each country to chip in more.
“We are checking if yes or no we could increase the
efficiency of the different instruments,” Juncker said. Asked
whether the ECB would be tapped to boost the fund’s clout, he
said: “I don’t think that this will be the main avenue of our
considerations.”
Finnish Deal
The ministers also smoothed a snag en route to a second
Greek package by settling the terms under which collateral will
be offered to AAA-rated Finland, home to a euro-skeptic movement
that catapulted to third place in April elections by opposing
further bailouts.
While the party now known as “The Finns” didn’t make it
into the ruling coalition, it captured the Finnish mood and
hardened the stance of new Prime Minister Jyrki Katainen in the
euro-rescue bartering.
Under the accord, Greek bonds will be transferred from
Greek banks to a trustee, which will sell them and invest the
proceeds in AAA rated bonds with maturities of 15 to 30 years.
In exchange for the special treatment, Finland will speed
its payments into a planned permanent rescue fund and forego a
share of profits from EFSF emergency loans. In the event of
default, it couldn’t cash in on the collateral until Greece’s
official loans mature, possibly as long as 30 years.
“It’s a complicated financial structure,” said EFSF Chief
Executive Officer Klaus Regling, who brokered the collateral
arrangement. He and Juncker said Finland is the only country
likely to take advantage of it.
Regling deserves “the Nobel prize for economics or the
Nobel peace prize” for engineering the compromise, Rehn said.
From Bloomberg.com
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