Germany Digs In on Greek Debt Extensions Rejected by Trichet

European Central Bank President Jean-Claude Trichet
European Central Bank president Jean-Claude Trichet. Photographer: Hannelore Foerster/Bloomberg

Germany stepped up demands that investors share the cost of a second Greek rescue after Jean-Claude Trichet rejected direct involvement by the European Central Bank.

“We have to insist on the participation of the private sector,” German Finance Minister Wolfgang Schaeuble told lawmakers in Berlin today, ignoring warnings from credit-rating firms that his proposal to extend Greek debt maturities by seven years would be deemed a default. A working group set up this week is charged with indentifying “a good solution for the involvement of the private sector that can and has to be supported by the European Central Bank,” he said.

As politicians try to find a plan by June 24 that would share the cost of a new rescue with bondholders, Trichet yesterday ruled out the Frankfurt-based ECB setting an example with its own assets. While the bank has said it could accept a plan in which investors voluntarily agree to buy Greek bonds to replace maturing debt, President Trichet said the ECB has no intention of rolling over its own Greek holdings.

Greek, Irish and Spanish benchmark bonds slumped after Schaeuble’s speech. Portugal’s 10-year bond yield rose to a record 10.45 percent before settling up 13 basis points at 10.42 percent as of 12:17 p.m. in London. Greece’s 10-year yield rose 12 basis points to 16.78 percent.

The euro declined 0.52 percent to $1.4452 as of 3:17 p.m. in Berlin.

‘Enormous Mistake’

Sustained ECB resistance could leave politicians facing the prospect of asking their taxpayers to finance a Greek budget shortfall that may amount to 90 billion euros ($130 billion) through 2014. Trichet also warned against Schaeuble’s approach, saying any solution forcing private-sector involvement amounts to a “credit event” and would be an “enormous mistake.”

“Trichet is really digging his heels in now,” said Tobias Blattner, an economist at Daiwa Capital Markets Europe in London who worked at the ECB until April. “The ECB has already shouldered the main burden of the crisis. These are the same politicians that dithered last year and got the ECB to pick up the pieces.”

The cost of insuring against default on government debt sold by Greece surged to a record yesterday, according to traders of credit-default swaps. Contracts on Greece soared 30 basis points to 1,522, according to CMA.

The ECB started buying the bonds of distressed governments in May last year to help ensure the transmission of its monetary policy in money and credit markets.

Stark, Constancio

ECB officials reinforced their resistance today to taking additional measures to stem the sovereign debt crisis, saying that it is again up to politicians and governments to respond.

“The burden is not on us,” Vice President Vitor Constancio said in Frankfurt today. “It wasn’t the ECB that asked for private-sector involvement.”

Executive Board member Juergen Stark called on governments to end their “fruitless discussion” about debt restructuring, which is unlikely to lead to “a substantial involvement of the private sector.”

“With a strong commitment from Greek authorities, I think there’s no need for private-sector involvement,” Stark told reporters in Frankfurt today. “The ECB is not against involvement of the private sector but conditions have to be clear: The involvement of the private sector has to be purely voluntary and not create a default.”

ECB Purchases

The central bank has so far purchased 75 billion euros worth of assets in the secondary market under its Securities Market Program, which it stresses is temporary and not designed to finance governments. It may have purchased about 40 billion euros of Greek government bonds, Barclays Capital estimates.

It is also financing the banking systems of Greece, Portugal and Ireland, which have together received bailouts totaling 256 billion euros, by continuing to lend them unlimited amounts of money at its benchmark rate.

While the ECB is prevented by its founding treaty from buying bonds on the primary market, it “could be instrumental in convincing private bondholders to roll over by re-launching its SMP program on the secondary market,” said Gilles Moec, an economist at Deutsche Bank AG in London. Trichet’s comments are a “further confirmation that the Europeans are still far from a fully fledged solution,” he said.

‘Skeptical Voices’

Schaeuble, in a June 6 letter to Trichet and fellow euro finance ministers, called for Greek bondholders to extend the maturities of their debt by seven years to give Greece more time to cut its debt and budget deficit.

“I have proposed a fair distribution of risks between taxpayers and private creditors for the phase of gaining time,” Schaeuble said today. “We’re taking skeptical voices and warnings from the European Central Bank on the involvement of the private sector seriously.”

Governments aim to reach agreement on a new aid package by a European Union summit on June 23-24. The IMF has threatened to withhold its share of what remains of Greece’s original 110 billion-euro bailout until governments guarantee that the country’s financing needs for the next 12 months are covered. The IMF was due to turn over 3.3 billion euros this month.

European governments and the IMF would lend as much as an extra 45 billion euros to Greece under a new bailout plan that also includes roughly 30 billion euros in asset-sale proceeds and about 30 billion euros in rollovers by creditors, two people with direct knowledge of the talks said yesterday.

While a debt rollover has been gaining support among EU officials, credit analysts at Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have indicated that pressure on private investors to participate would prompt a default rating on Greek debt.

“We exclude all elements which are not voluntary,” Trichet said. Asked if the ECB would roll over its own holdings of Greek government bonds if private investors agreed to do so, Trichet said: “It is certainly not our intention.”

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