"Bail-out 2.0" for Greece: Emergency EU Meeting Has New Ideas (7/20)     Print

Ahead of an emergency eurozone meeting on a second Greek bail-out on July 21 in Brussels, a mix of new options has emerged in an effort to shift part of the costs to creditor banks – without triggering a default call by international ratings agencies.

 

Debt-rating agencies earlier indicated that much-discussed plans for voluntary-based private bondholders’ acceptance of easier conditions for Greece would amount to a default.

As the meeting started in Brussels, French president Nicolas Sarkozy reportedly agreed to take a bank tax proposal off the table – a proposal which had earlier emerged as a likely consensus plan. The shift allows German Chanchellor Angela Merkel to push through an initiative for more direct measures to get private bondholders to help pay for the bail-out – a significant advantage at a meeting increasingly seen as the most important in the history of the euro.

Ahead of the meeting, sources said that eurozone countries' leaders now seem willing to let Greece default on its debt under a crisis response that would involve a bond buyback and a debt swap (but no new tax on banks), according to CNBC, a business channel on U.S. television. It quoted a draft document but said that it remained unclear whether leaders would actually approve this plan.

According to the draft document, the eurozone bailout fund, the European Financial Stability Facility (EFSF) will provide loans to Greece, Ireland and Portugal at a lower interest rate and for longer maturities. EFSF loans reportedly would be extended from 7.5 years to at least 15 years and the interest rate will be lowered from around 4.5 percent currently, in the case of Greece and Portugal, to around 3.5 percent. The euro rose on the report.

This scenario fits the recommendations for saving the euro made yesterday in the U.S. by Nouriel Roubini, an economist who has won high regard for his insights during the financial and economic crises affecting both the U.S. and the EU. His recommendation centers on a bond swap to ease Greece's plight: that would trigger "a credit event" (in effect, a temporary selective default), but Roubini said that the damage would be short-lived if European leaders handle the crisis skillfully now.

Quick action has been urged by the International Monetary Fund and apparently, too, by President Barack Obama, who phoned German Chancellor Angela Merkel on July 19. He had already urged Germany to be more forthcoming toward Greece in an earlier phase of the Greek crisis.

Other options for private sector involvement are still on the table – even those that could lead to a Greek default. Eurozone leaders are expected to agree on a range of options for private bondholders to contribute – without adopting any “take-it-or-leave-it” approach.

The ideas being floated seem designed to help Berlin (and others such as the Dutch government) ward off public opposition to more help for Greece by shifting part of the burden to creditor banks.

Doubts about the plan seem to persist at the European Central Bank, which is adamant that the eurozone governments should not make concessions to domestic public opinion by making concessions that trigger a “default” ruling by the credit agencies.

 

-- By European Affairs