April 23, 2024

In Europe, an Outline of Options

After more than six hours of talks in Brussels, the ministers issued a statement outlining a range of options for reducing the debt burden on nations that have accepted loans, including reducing their interest rates and extending loan maturities, as well as helping them to buy back their bonds.

The meeting failed, however, to resolve the continuing dispute over private sector involvement in a second bailout for Greece, and over whether Europeans should run the risk of their rescue being declared a selective default by the bond rating agencies.

That argument has put Germany — which is seeking a substantial role for private investors — at odds with the European Central Bank, which wants to avoid the risk of a new Greek bailout being declared a default, thereby spreading further alarm in the market.

Monday’s talks took place against a backdrop of acute market anxiety with the spread, or risk premium, of Italy’s bonds over their German equivalents widening amid fears that Italy will be swept into the sovereign debt crisis.

The statement issued Monday by the ministers of the 17-nation euro zone said proposals would be considered “to resist contagion risk,” including “enhancing the flexibility and the scope” of the 440-billion-euro bailout fund (about $600 billion at the time) agreed to last year.

These would include the possibility of lengthening the maturities of loans offered to debtor countries and cutting the interest rates on them.

The idea of buying bonds on the secondary market had been rejected several months ago, but now appears to be gathering momentum.

“There are a variety of ways of enhancing the flexibility,” said Olli Rehn, the European Union economic and monetary affairs commissioner, adding that bond buybacks were one of those.

“I would at this stage not exclude any option,” he added.

The idea is supported by the European Central Bank, which argues that it would satisfy calls for a private sector contribution because Greek bonds would be sold at below their face value. By being voluntary, such a program would not prompt further downgrades by the ratings agencies.

Jean-Claude Juncker, the prime minister of Luxembourg and head of the euro zone finance ministers, said details would be filled in “shortly, and shortly means as soon as possible.”

But confusion remained over the euro zone’s broader approach toward involving the private sector in a new bailout of Greece. Until recently the European governments had insisted that private sector involvement in a new rescue for Greece should be voluntary, to avoid a selective default.

Technical negotiations in recent weeks have led several governments to believe that those objectives are incompatible, and Monday’s declaration watered down those conditions. It also welcomed ideas for voluntary private involvement, but did not say such contributions must be voluntary or that they should be substantial. The declaration also noted that the bank remained opposed to moves that would provoke a “credit event” or selective default, but it did not describe that as the position of the euro zone.

Last week a French plan for a voluntary rollover of Greek debt, designed to satisfy the ratings agencies, was rejected by Standard Poor’s. That prompted Germany to revive its earlier idea of bond swaps on the basis that, if any plan involving private investors was destined to fall foul of the ratings agencies, its model should be reconsidered.

On Monday, the Netherlands continued to press for a substantial private sector contribution, while Austria’s finance minister, Maria Fekter, said any plan that included banks and other investors “must be expressly voluntary.”

Germany had gone into the meeting skeptical of bond buyback plans, though it has not ruled out the idea, said a government official with knowledge of the discussions. Once such a plan was established, the official said, Greek bond prices would immediately rise, making the buybacks more costly and canceling out the amount effectively contributed by investors.

“You need to mobilize quite a lot of money for relatively little impact in terms of private sector involvement or debt reduction,” the official said.

Such a plan could also require a revision of the current legislation authorizing the European rescue fund, which was established last year and has already provided aid to Ireland and Portugal. That would add more political complications than already exist, the official noted. “It raises a number of question marks,” he said. “I don’t want to rule it out.”

Greece received a 110-billion-euro bailout last year, much of it in the form of bilateral loans from its European Union partners. If those loans were used instead to buy bonds, no rule changes would be needed.

The European Central Bank has already bought Greek, Portuguese and Irish bonds on the open market for 74 billion euros. But it has not made any purchases since March and is not expected to make any more purchases for fear of taking on too much risk. The bank is pushing the European Union to take on that task instead.

Stephen Castle reported from Brussels and Jack Ewing from Frankfurt.

Stephen Castle reported from Brussels and Jack Ewing from Frankfurt.

Article source: http://feeds.nytimes.com/click.phdo?i=dd06b49b7471bf4b2e73638b8ee1eeee