When it comes to Greek bonds, Europe is trying to have its cake and eat it, too.
Germany and other strong euro-zone countries, trying to fashion a second bailout for Greece, want the country's private-sector creditors to bear some of the burden in exchange for granting new taxpayer money to Athens.
The European Central Bank, however, backed by France, doesn't want to do anything that would cast Greece into default or trigger losses for banks that hold its government bonds.The impasse deepened with a letter released Tuesday from German Finance Minister Wolfgang Schäuble to ECB President Jean-Claude Trichet and other euro-zone finance ministers. Reiterating Germany's approach, it rejected the milder option and called for a "quantified and substantial contribution" from private creditors.
At root is a consequence that is difficult to escape. Anything that meets Mr. Schäuble's demands and substantially hits Greece's creditors—and thus substantially reduces the amount of money Germany and others must put in—will also very likely be seen by credit-rating agencies as a default on Greek debt. It also will have at least some impact on banks' finances. Nearly 70% of the exposure to Greek government debt outside Greece is concentrated in French and German banks.
"It is hard to envision a set of circumstances where they can provide genuine debt relief—private-sector debt relief—to Greece and for that not to be viewed essentially as a default event," said David Riley, head of sovereign ratings at Fitch Ratings.
German Chancellor Angela Merkel, on a visit to Washington, discussed the issue with President Barack Obama. The two agreed that the European debt crisis must be brought under control, with Mr. Obama predicting "disastrous" results if there is an "uncontrolled spiral and default" in Europe. "We think that America's economic growth depends on a sensible resolution of this issue," he said.
Ms. Merkel agreed, and said the problem was Europe's to solve. "The stability of the euro zone is...an important factor of stability for the whole of the global economy. So we do see clearly our European responsibility. And we're shouldering that responsibility together with the IMF," she said.
WSJ
