Euro zone governments are considering a plan to prevent a Greek default under which private investors would be asked to maintain their exposure to its debt and Athens would receive a new package of EU/IMF aid, euro zone sources said.
The sources told Reuters of the new strategy on Thursday after the European Central Bank raised the stakes in its bid to prevent a restructuring of Greek debt by telling governments it would refuse to accept the bonds as collateral in the event of such a move.
The threat, made by ECB Executive Board member Juergen Stark at a conference in Athens on Wednesday came after European finance ministers raised the possibility of a "soft restructuring" via debt maturity extensions earlier this week.
One source with insight into European discussions on Greek debt said any "soft" or "hard" restructuring that might trigger a "credit event" -- or the payout of default insurance contracts -- was now off the table.
Instead of a maturity extension, which might decrease the value of bonds and trigger such an event, banks would be encouraged to maintain their holdings of Greek debt and buy new bonds to replace issues as they matured, the source said.
This would be done in combination with a new package of Greek reforms and austerity, as well as more EU/IMF money to secure Greece's funding needs through 2014.
"We hope to have an agreement by the end of June," the source told Reuters.
The source did not make clear how the bloc would convince owners of Greek bonds to roll over their holdings nor say how much additional aid the EU/IMF might be willing to provide on top of the 110 billion euro package given to Greece last year.
VIENNA INITIATIVE
EU Economic and Monetary Affairs Commissioner Olli Rehn has referred to the Vienna Initiative as a model for debt rollover.
The initiative was an agreement at the height of the global financial crisis between the European Central Bank, the European Bank for Reconstruction and Development, regulators and banks with subsidiaries in central and eastern Europe.
Under it, parent bank groups publicly committed to maintain their exposures and recapitalize their subsidiaries in central and eastern European countries as part of financial aid packages from the European Union and the IMF.
Greek sovereign debt is forecast to rise to nearly 350 billion euros by the end of 2011, or 154 percent of its gross domestic product (GDP), one of the highest levels in the world.
Many economists say a restructuring of the debt is inevitable, but European governments have promised not to force losses on creditors before mid-2013.
ECB officials have warned for weeks that a debt restructuring would have catastrophic consequences for the euro zone and stepped up their rhetoric this week after Eurogroup Chairman Jean-Claude Juncker suggested the bloc was open to a voluntary extension of Greek debt maturities.
"For the ECB, according to our statutory obligations, a debt restructuring would undermine the collateral adequacy of Greek government bonds," the ECB's Stark said.
"This means that a debt restructuring would make the continuation of large parts of central bank liquidity provision to the banking system of Greece impossible."
The comments, and a report in the Financial Times Deutschland, that ECB President Jean-Claude Trichet had issued the same warning to euro zone finance ministers in a heated meeting of the Eurogroup on Monday, weighed on the euro, which slipped to $1.4235.
The cost of insuring Greek debt against default also rose and the spreads between Greek 10-year bonds and those of safer German benchmarks hovered close to 13 percent, near a record high.
Greek banks rely on the system of collateral to fund themselves and refusing to accept government bonds as security would effectively cripple them, with potentially disastrous knock-on effects for other European banks exposed to Greece.
HIGH FLEXIBILITY
Economists doubted the Frankfurt-based central bank would follow through on the threat, describing it as a negotiating ploy to halt the momentum toward some form of restructuring.
"I think this is all part of the negotiation process. Deep down the ECB probably knows something has to happen, but they want it to be as mild as possible," said Gilles Moec, an economist at Deutsche Bank.
ECB statutes gives the bank a high degree of flexibility in determining what it can and cannot accept from banks seeking short-term loans, stating only that lending should be based on "adequate collateral".
The ECB has continued to accept Greek and Irish government bonds as collateral in its liquidity operations regardless of their credit rating and could presumably decide to accept voluntarily swapped bonds with extended maturities.
The euro zone source said, however, that the ECB had made clear that in the event a restructuring of Greek debt triggered payouts on default insurance contracts -- credit default swaps -- it would stop accepting the bonds as collateral.
Beyond the impact on the euro zone, the ECB may also be concerned about the effect of a restructuring on its own books.
It has bought an estimated 40-50 billion euros in Greek sovereign debt as part of its controversial bond-purchasing program and has indirect exposure via the tens of billions of euros in Greek paper it has already accepted as collateral in its lending operations.
REUTERS
