Banks' Role in New Greek Bailout Falling Short
Efforts to secure the private sector's involvement in a second bailout of Greece have stalled and there is little chance of reaching the 30 billion euros target figure, euro zone diplomats said on Friday.
Germany, the Netherlands and other northern euro zone states demand the private sector must bear a portion of the cost of a second package of loans to Greece so that the burden does not fall solely on the public sector and taxpayers.
The aim is to get private creditors -- banks, pension funds and insurance companies -- to provide around 30 billion euros ($43 billion) to a total package of around 110 billion euros by rolling over their holdings of Greek bonds when they mature.
The remainder would come from Greek privatisation receipts and from the EU and IMF, which would stump up around 60 billion.
But two weeks of negotiation among EU officials, the European Central Bank and bankers represented by the Institute of International Finance (IIF) have made almost no progress, with only the outline of private sector proposals on the table.
"We may not be all the way back at square one, but we're pretty close," said one senior euro zone official.
"It's pretty hard to see how they're going to get the private sector involvement the Germans want."
Euro zone finance ministers will discuss the state of play at a meeting in Brussels on Monday, with little expectation that a breakthrough will come soon. Greece is hoping to secure a second package by mid-September.
One euro zone diplomat told reporters on Friday that the talks might end up securing private sector involvement of 15 billion euros, and touted the figure as a success, but it remains unclear whether that can even be attained.
"Fifteen billion out of 110 billion, it's already quite a lot, it's really good," the diplomat said, playing down concerns about how the negotiations with bankers were going.
Talks with the IIF initially focused on a French proposal for banks and other creditors to roll over up to 70 percent of their Greek government bonds maturing before the end of 2014 by purchasing new Greek bonds with a 30-year maturity that would be guaranteed by other AAA-rated securities.
But it was not clear that the major credit ratings agencies would approve such a rollover as voluntary, regarding it instead as a default, or selective default at best, which would have severe repercussions on financial markets.
After talks in Rome on Thursday, the IIF said it was now looking at the possibility of a buy-back of Greek bonds, and there is also a German proposal for a bond exchange, with current bonds being swapped for longer-dated securities, something ratings agencies have said would constitute default.
HOW VOLUNTARY IS VOLUNTARY?
ECB President Jean-Claude Trichet said on Thursday, after the central bank decided to increase euro zone interest rates by a quarter-point to 1.5 percent, that no one should imagine the private sector's involvement was guaranteed.
"You cannot presume that it is normal ... to have some kind of private sector involvement," he said, adding that his position remained that any involvement by private creditors had to be absolutely voluntary.
That is the broad position across the euro zone, but the Dutch finance minister, Jan Kees de Jager, said on Thursday that if the private sector was not going to come up with a sizeable contribution voluntarily, it should be compelled to take part.
"We need to accept that a voluntary contribution is not realistic," he told Dutch newspaper Het Financieele Dagblad.
"If a compulsory contribution from the banks leads to a short and isolated rating event (a credit rating downgrade), then that is not so bad."
When EU finance ministers meet on Monday and Tuesday, credit ratings agencies will be one of the issues under discussion, with growing frustration in Europe at the role played by Standard & Poor's, Moody's and Fitch.
Moody's this week downgraded Portugal's debt by four notches to "junk status", a move that shook financial markets and drew the ire of EU leaders, who said it was unjustified when Portugal is undergoing an EU/IMF structural adjustment programme.
While it is hard to see what leverage the EU can gain in criticising the ratings agencies there is now discussion about the possibility of establishing a European credit rating agency.
Finance ministers will also discuss the results of stress tests on 91 European banks that are due to be released on July 15 by the European Banking Authority.
An EU finance document obtained by Reuters on Friday showed that EU member states stood ready to provide support to any banks that fail the tests and cannot raise sufficient capital from investors to strengthen themselves. (Additional reporting by Julien Toyer, John O'Donnell and Ilona Wissenbach in Brussels, editing by Mike Peacock)