European officials preparing Greece’s second bailout in two years may offer bondholders incentives to roll over maturing debt without triggering a credit-rating downgrade that would roil Europe’s banking system, two people with knowledge of the talks said.
Investors may be given preferred status, higher coupon payments or collateral as inducements to buy bonds replacing Greek debt maturing between 2012 and 2014, said the people, who declined to be identified because the talks are in progress.
European leaders are trying to prevent the euro area’s first sovereign default. Last year’s 110 billion-euro ($159 billion) rescue failed to prevent an investor exodus from Greece, saddled with Europe’s highest debt load amid a three-year economic slump. The upgraded package would share costs with investors while skirting a technical default, the people said.
“We are also examining the feasibility of voluntarily rescheduling, which would not create a credit event,” European Union Economic and Monetary Commissioner Olli Rehn said in an interview yesterday in New York. “Debt restructuring is not on the table, it’s not in the cards, it will not be part of our agenda.”
For months, a maturity extension was taboo, as Europe counted on a mix of budget cuts and official loans to put the country’s finances on track and stop the debt crisis at its source.
Greece has since given up plans to go back to bond markets for funding in 2012, offering deeper deficit cuts and the sale of state assets in exchange for follow-up loans to prevent a default.
The country’s additional needs may be known tonight or tomorrow, as European and International Monetary Fund officials complete work on an assessment of Greece’s public accounts.
Greece’s fate hinges on the stance taken by Chancellor Angela Merkel of Germany, the country that designed the euro in its image and as Europe’s largest economy is the biggest underwriter of bailouts.
Germany has a “clear expectation” that private creditors will bear some costs of Greece’s follow-up package, Finance Ministry spokesman Martin Kotthaus said in Berlin today.
Greece’s debt is likely to mushroom to 157.7 percent of gross domestic product in 2011, the highest in euro history, the European Commission said May 13. It predicted a 3.5 percent economic contraction, shedding doubts whether Greece will generate the tax revenue to pay off its debts.
European calls for austerity have sparked political warfare in Greece, with opposition parties rejecting Prime Minister George Papandreou’s proposals on May 27. The biggest opposition party, New Democracy, objects to the “policy mix” and not to the principle of saving money, said Notis Mitarachi, the party’s alternate head of economic policy.
“There is in no way a desire to obstruct implementation of the program,” Mitarachi told Bloomberg Television today. “We clearly agree with the need to reduce the budget deficit.”
Greek 10-year bonds trade at less than 55 cents on the euro, a sign of investors’ diminishing expectations of being repaid. Ten-year Greek bonds fell today, pushing the yield up 16 basis points to 16.2 percent at 122:10 p.m. in London.
Europe’s central bankers are caught in the middle of the debate. They have warned that any form of debt restructuring would shatter the Greek banking system, though they are unable on their own to dictate how the euro region’s 17 governments get out of the crisis.
The European Central Bank “might have to reconsider” its opposition to restructuring, Peter Bofinger, a member of Merkel’s council of economic advisers, told Bloomberg Television from Munich today. A restructuring of Greek debt carries risks “but is worth it,” he said.
Europe’s financial leaders need to hammer out a revised Greek package by the end of June, in time to persuade the IMF to pay out its share of the next tranche of loans.
The Washington-based lender provided 30 billion euros of Greece’s original loans, along with a third of the loans since granted to Ireland and Portugal as the spreading crisis threatened the integrity of the euro.
Senior aides to European finance ministers are discussing elements of the package in Vienna today. The ministers themselves may meet as early as next week, with final decisions due at a summit of government leaders on June 23-24.
So-called negative incentives are also under consideration, such as cutting off old Greek bonds from eligibility for use as collateral with the ECB while granting that privilege to new bonds, the people said.
Policy makers’ efforts echo 2009’s so-called Vienna Initiative that leaned on creditors in eastern Europe to roll over expiring bonds, the people said.
European politicians have given sometimes conflicting definitions of options such as “restructuring,” “reprofiling,” “soft restructuring” and “default.” French President Nicolas Sarkozy said May 27 that if “restructuring” means a failure to pay off debt, “then this word won’t be part of the French vocabulary.”