EU Sees Possible Greek Debt ‘Soft Restructuring’ in Aid Bid

EU Sees Possible Greek Debt ‘Reprofiling’ in Follow-Up Plan
Nemat Shafik, deputy managing director of the International Monetary Fund, left, speaks with Jean-Claude Juncker, Luxembourg's prime minister, and president of the Eurogroup, at the meeting of European Union finance ministers at the European Council headquarters in Brussels. Photographer: Jock Fistick/Bloomberg

European finance ministers for the first time floated the idea of talks with bondholders over extending Greece’s debt-repayment schedule, saying that last year’s 110 billion-euro ($156 billion) rescue has failed to restore the country to financial health.

Europe would consider “reprofiling” Greek bond maturities as part of a package including stepped-up sales of state assets and deeper spending cuts, Luxembourg Prime Minister Jean-Claude Juncker said late yesterday.

“We’ll have to see whether we can’t proceed to a soft restructuring of Greek debt,” Juncker, who chaired last night’s meeting of euro-area finance ministers, said at the Lisbon Council in Brussels today. “I am strictly opposed to a large restructuring of Greek debt.”

Introducing that prospect marks a break in Europe’s crisis-fighting strategy, with governments potentially shifting some costs to bondholders instead of relying on taxpayer-funded bailouts to stamp out the debt crisis. The talks were clouded by the absence of International Monetary Fund Managing Director Dominique Strauss-Kahn, who was denied bail in New York yesterday after being arrested on sexual-assault charges.

Previously, European governments had ruled out writedowns on privately held bonds before a permanent rescue fund is set up in mid-2013, and then only as a last-ditch option for countries deemed insolvent. Juncker last night said a “reprofiling” would give breathing space for Greek budget cuts to work.

‘Not Terribly Attractive’

Postponing Greece’s payments is “not terribly attractive to investors, but probably better than the other alternatives, in conjunction with further money, further bailout, which I think will come,” Nick Beecroft, a senior markets consultant at Saxo Bank A/S, told Mark Barton on Bloomberg Television’s “Countdown.”

The euro was little changed at $1.4167 as of 3:10 p.m. in London. The currency has slipped from a 17-month high of $1.4940 on May 4 amid concern over the escalating debt crisis. Greek two-year yields fell 4 basis points to 24.87 percent.

To be sure, striking an agreement with banks to reschedule Greece’s bond redemptions wasn’t discussed in the meeting, and finance ministers including Christine Lagarde of France and Didier Reynders of Belgium voiced opposition.

“Restructuring, reprofiling -- off the table,” Lagarde told reporters. “We don’t want to do that,” Reynders said.

Germans’ View

That exposed a rift with Germany, which as the biggest guarantor of the euro bailouts is at the origin of the restructuring debate. Deputy Finance Minister Joerg Asmussen said it is first up to Greece to patch its fiscal scars by cutting deeper into spending and selling more state assets.

A failure of the renewed Greek effort would trigger a “discussion of measures that don’t only burden the taxpayer but also involve the private sector on a voluntary basis,” Asmussen said.

Asmussen defined “reprofiling” -- also dubbed a “soft restructuring” in European circles -- as “a pure extension of maturities of existing bonds without changing the principal and the interest rates.” Such a setup would be designed to avert a chain reaction of claims linked to credit-default swaps.

Official creditors in March granted Greece more time to repay its current loans and are considering another extension to save it from becoming the first euro country to default.

Germany also hasn’t yet obtained ironclad guarantees that the post-2013 rescue fund will have senior status with provisions to force bondholders to share costs, Asmussen said.

Investors’ Survey

After fighting the notion of a Greek insolvency for more than a year, the Brussels talks suggested that Europe’s financial leaders are moving closer to the view of the 85 percent of international investors who, in a Bloomberg poll last week, said Greece is likely to default.

“We suggest that Greece is insolvent and that at some point the can cannot be kicked down the road any further,” Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said in an “InBusiness with Margaret Brennan” interview on Bloomberg Television. “Ultimately debt holders will have to bear some of the burden as well.”

The finance chiefs gave an inkling of a possible strategic revamp in yesterday’s approval of a 78 billion-euro aid program for Portugal, the third country to succumb to the debt crisis.

In addition to promising deficit cuts and the sale of assets, Portugal will “encourage private investors to maintain their overall exposures on a voluntary basis,” the ministers said in a statement. Portugal’s package still needs approval by all euro-area governments, with most putting it to parliament.

European-IMF Team

The ministers’ next meeting, on June 20, looms as a deadline to decide on a 12 billion-euro disbursement to Greece and on the shape of a follow-up aid package. It will be based on a progress report by a joint European-IMF team now in Greece.

Europe’s richer countries put Greece under pressure to go beyond current plans to sell 50 billion euros in government assets, potentially by setting up a new privatization agency. Faced with the fresh demands, Greece is working on a new savings plan to be unveiled in coming days, government spokesman George Petalotis said in Athens.

Greece’s debt will balloon to 157.7 percent of GDP in 2011 while the economy slumps for the third year, the European Commission forecast last week, fueling doubts whether the country will generate enough growth to pay its bills.

Finance ministers said the IMF’s role as the contributor of a third of the bailout money for Greece, Ireland and Portugal won’t be hampered by Strauss-Kahn’s May 14 arrest on sexual-assault charges in New York.

Strauss-Kahn, 62, who has denied the charges, was ordered held without bail by a New York judge. While he didn’t enter a plea yesterday in Manhattan Criminal Court, his lawyer has said he will plead not guilty. The Washington-based IMF was represented in Brussels by Nemat Shafik, a deputy managing director.

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