Merkel Heeds ECB on Greece Saying Bondholder Role Voluntary

Germany's Angela Merkel with France's Nicolas Sarkozy
Germany's Chancellor Angela Merkel with France President Nicolas Sarkozy. Photographer: MicheleTantussi/Bloomberg

Chancellor Angela Merkel retreated from German demands that bondholders be forced to shoulder a “substantial” share of a Greek rescue, saying she’ll work with the European Central Bank to avoid disrupting markets.

“We would like to have a participation of private creditors on a voluntary basis,” Merkel told reporters in Berlin today at a joint press conference with French President Nicolas Sarkozy. This “should be worked out jointly with the ECB and there shouldn’t be any dispute with the ECB on this.”

The euro, stocks and Greek bonds rallied as Merkel and Sarkozy signaled a reconciliation between German calls for investors to help rescue Greece with warnings from the ECB and France that a compulsory move risked triggering the euro area’s first sovereign default. Attention now shifts to Athens, where Prime Minister George Papandreou overhauled his Cabinet to try and secure passage of austerity measures needed for a bailout.

Merkel declined to give a date for the detail of the aid package to be worked out, saying the matter must be resolved “as quickly as possible.” European finance ministers next meet on Greece in Luxembourg on June 19-20, followed by a Brussels summit of European Union leaders on June 23-24.

The finance chiefs will probably “find an agreement that the IMF and the Europeans can pay out the next tranche to Greece, given that the key ingredients of the next program are known,” German Deputy Finance Minister Joerg Asmussen said in a Bloomberg Television interview today. The program should be completed by their next scheduled meeting on July 11, he said.

Vienna Initiative

“The aim is involvement of the private sector on a voluntary basis, and for that the Vienna Initiative, as it’s called, is a good basis,” Merkel said. “I think we can achieve something on this basis.”

Echoing the Vienna plan, used during the financial crisis of 2009 for eastern European units of banks to maintain their exposure, would involve encouraging creditors to roll over expiring bonds, buying time for Greece until its austerity program shows results or until a permanent rescue fund kicks in from mid-2013. A rollover involves reinvesting the proceeds from maturing bonds in new securities.

“This is a breakthrough,” Sarkozy said. “Finally we have found a solution for an involvement of the private sector on a voluntary basis,” he said. “What we decided just now is precisely in the spirit of what was decided in Vienna.”

Greek Yields Plunge

Greek two-year notes surged, driving the yield down 168 basis points to 28.01 percent as of 3:37 p.m. in London, paring a weekly increase that pushed it above 30 percent yesterday for the first time since the euro’s introduction.

The Stoxx Europe 600 Index advanced 0.4 percent after falling as much as 1 percent, and the euro gained 0.7 percent against the dollar, rebounding from a 0.5 percent slide.

Merkel now faces the task of convincing her own coalition and the public that private investors can be swayed to share the burden in Greece with taxpayers. After a pounding in five state elections this year and facing another two votes in September, ruling lawmakers had shown little appetite for backing down.

Klaus-Peter Flosbach, the financial policy spokesman in parliament for Merkel’s Christian Democratic bloc, indicated the coalition’s stance may be easing in line with Merkel.

‘Adequate Degree’

“The coalition has agreed to support further aid for Greece only if private creditors participate to an adequate degree,” Flosbach said today in an e-mailed statement after Merkel spoke. “We want them to participate to the furthest possible extent, but not to such a degree that it would spark a much worse crisis in the euro zone. If the government finds a solution to this area of conflict -- we’ll back it.”

Finance Minister Wolfgang Schaeuble told lower-house lawmakers in a speech seven days ago that the government “has to insist on the participation of the private sector.” Yet his demands that bond maturities be extended by seven years ran into ECB resistance and credit-rating company warnings the move was tantamount to default, stalling efforts to craft an aid package earlier this week.

Merkel’s government is now “open” to discussing ways to achieve “voluntary, substantial, reliable and quantifiable” private-sector involvement, Deputy Finance Minister Asmussen said, adding that Merkel and Schaeuble are “on the same page” on this and working with the ECB to make it happen.

“There will be a rescue package and Germany will back down,” accepting a solution that involves “largely lip service by the large euro-area banks,” Henrik Enderlein, a political economist at the Hertie School of Governance in Berlin, said by phone. “And then it’s just a matter of presentation and of marketing.”

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