Germany Proposes 7-Year Extension on Greek Bonds

Setting itself firmly at odds with the European Central Bank, the German finance ministry has proposed extending maturities on Greek bonds by seven years, insisting that private investors must share the burden of any fresh financial aid to Greece.

The comments were made in a letter, dated Monday and released Wednesday, from the finance minister, Wolfgang Schäuble, to his European counterparts, the International Monetary Fund and the E.C.B.

“Any additional financial support for Greece has to involve a fair burden sharing between taxpayers and private investors and has to help foster the Greek debt sustainability,” he said in the letter.

He added that any deal among European finance ministers and the I.M.F. at a meeting on June 20 has to “lead to a quantified and substantial contribution of bondholders to the support effort,” and “can best be reached through a bond swap leading to a prolongation of the outstanding Greek sovereign bonds by seven years.”

The position is likely to frustrate the E.C.B., which has been positioning itself against moves to force private bondholders to book partial losses on their holdings.

According to analysts, the bank fears that credit agencies might see this as a default, and thus issue ratings downgrades. That in turn would mean that the E.C.B. would not be able to accept Athens’ debt as collateral for fresh loans, thus hampering attempts to provide liquidity to ailing Greek banks, which have become dependent on funds from Frankfurt.

The central bank also appears to fear possible spillover contagion in the European banking sector in the event of a Greek default.

In the letter, Mr. Schäuble said a return by Greece to capital markets next year was “unrealistic” and that the current international support programs for Athens were “insufficient to cover Greece’s financial needs over the program period.” He said Greece would need new funding in place by mid-July.

Analysts at Barclays Capital said in a research note Wednesday that “the concept of private sector burden sharing is receiving growing attention as a way of achieving political consent in countries such as Germany and Finland for a new Greek bailout package.”

They added that the concept has “yet to be fleshed out.”

The E.C.B. they said, would rather encourage private sector holders to re-lend the proceeds of redeeming Greek debt back to Athens on the same terms in what is called a “voluntary rollover,” which would presumably not trigger a default.

The letter has been disseminated just before Mr. Schäuble is expected to discuss the Greek situation with German lawmakers, some of whom have been demanding private sector involvement in any Greek debt restructuring.

A spokesman for the Finance Ministry in Berlin declined to comment on the letter and said that there was no fixed time scheduled for the minister’s meeting with lawmakers.

Article source: http://www.nytimes.com/2011/06/09/business/global/09bailout.html?partner=rss&emc=rss