Greek creditors may be headed toward a rollover agreement involving 70 percent of their bonds to prevent a default and meet politicians’ calls that they contribute to Greece’s second rescue in as many years.
Under the French proposal, half the Greek debt held by banks and insurers maturing in the next three years would be swapped for new 30-year Greek bonds. The redemptions from another 20 per cent would be used to buy 30-year, AAA-rated, zero-coupon bonds to be held as collateral, two people familiar with the plan said.
“We’ve been working on this” and hope other countries will join the proposal, French President Nicolas Sarkozy said on Monday at a press conference in Paris. Germany’s biggest banks and insurers are weighing the French proposal, a person familiar with the matter said o Monday.
German and French lenders are the biggest European holders of Greek debt and their participation in the plan is key to the European Union goal of getting banks to roll over at least euro 30 billion ($43 billion) of bonds. The debt swap is part of a broader aid package EU leaders have pledged to pass next month to prevent the euro-region’s first default a year after the euro 110-billion Greek bailout that failed to stop the debt crisis.
EU PACKAGE
Euro region finance ministers meet on July 3 in Brussels to advance a plan that is supposed to be approved at a follow up meeting on July 11. A deal on a new aid package is needed to free up a euro 12-billion payment from the original bailout that Greece needs to meet euro 6.6 billion of bond maturities in August.
“If the private sector is voluntarily getting involved then that would be seen as positive because it would help avert a Greek default,” said Orlando Green, a fixed-income strategist at Credit Agricole SA in London. Investor concerns that time is running out have pushed up the cost of insuring European debt against default. The Markit iTraxx SovX Western Europe Index of credit default swaps on 15 governments rose 3 basis points to a record 246. Contracts tied to Greece climbed 28 basis points to 2,143, signaling an 84 percent probability of default within five years.
ELIGIBLE BONDS
Greek has about euro 330 billion of outstanding debt European banks hold euro 17.2 billion of Greek bonds maturing by the end of 2013, Citigroup Inc estimated in a June 23 report. Greek banks, which will join a rollover, hold almost euro 22 billion of bonds maturing in that period and the country’s central bank owned euro 5.1 billion of the debt likely eligible for the rollover, Citigroup estimated.
France’s proposal came after separate talks last week with German, Dutch, Belgian and French banks on the rollover. “The German government welcomes it when proposals come from the private sector, including those on private-creditor participation that are now coming out of France,” German finance ministry spokesman Martin Kreienbaum told reporters in Berlin on Monday. Talks with German financial institutions are ongoing, he said. The French proposal was only one of several options being studied by financial companies and it was unclear whether an agreement could be reached this week, Deutsche Bank AG Chief Executive Officer Josef Ackermann said.
