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European Creditors Move Closer to Greek Debt Rollover Plan

European Creditors Move Closer to Greek Debt Rollover Plan
Protestors shout in front of the Greek parliament during a protest for a fourth consecutive week against austerity measures in Athens, June 26, 2011. Photographer: Kostas Tsironis/AP

June 27 (Bloomberg) -- Greek creditors may be headed toward a rollover agreement involving 70 percent of their bonds to prevent a default and meet politicians’ calls that they contribute to Greece’s second rescue in as many years.

Under the French proposal, half the Greek debt held by banks and insurers maturing in the next three years would be swapped for new 30-year Greek bonds. The redemptions from another 20 percent would be invested in a special purpose vehicle that would serve as collateral for the banks, two people familiar with the plan said.

“We’ve been working on this” and hope other countries will join the proposal, French President Nicolas Sarkozy said today at a press conference in Paris. Germany’s biggest banks and insurers are weighing the French proposal, a person familiar with the matter said today.

German and French lenders are the biggest European holders of Greek debt and their participation in the plan is key to the European Union goal of getting banks to roll over at least 30 billion euros ($43 billion) of bonds. The debt swap is part of a broader aid package EU leaders have pledged to pass next month to prevent the euro-region’s first default a year after the 110 billion-euro Greek bailout that failed to stop the debt crisis.

EU Plan

Euro region finance ministers meet on July 3 in Brussels to advance a plan that is supposed to be approved at a follow up meeting on July 11. A deal on the rollovers is needed to get the new aid package passed, a condition for freeing up a 12 billion-euro payment from the original bailout that Greece needs to meet 6.6 billion of bond maturities in August.

“The mechanics of the French plan are so daunting that I don’t see how any bank can evaluate them,” said Carl Weinberg, chief economist of High Frequency Economics Ltd in Valhalla, New York. “Half the debt maturing over the next three years includes paper at 98 cents on the dollar and other paper at 54 cents. Do banks have a choice? If so, they would fork over the 2013s or the 2014s and hold on to the 2012s.”

Investor concerns that time is running out have pushed up the cost of insuring European debt against default. The Markit iTraxx SovX Western Europe Index of credit default swaps on 15 governments rose 3 basis points to a record 246. Contracts tied to Greece climbed 28 basis points to 2,143, signaling an 84 percent probability of default within five years, according to CMA.

Bonus Coupon

Banks that roll over their debt under the French plan would receive 30-year bonds with a coupon of about 5.5 percent, the people said. Banks would also receive a bonus on the coupon if the Greek economy expands. The payout would be sweetened by the rate of Greece’s gross domestic product up to 2.5 percentage points, the people said.

Greece has about 330 billion euros of outstanding debt. European banks hold 17.2 billion euros of Greek bonds maturing by the end of 2013, Citigroup Inc. estimated in a June 23 report. Greek banks, which will join a rollover, hold almost 22 billion euros of bonds maturing in that period and the country’s central bank owned 5.1 billion euros of the debt likely eligible for the rollover, Citigroup estimated.

France’s proposal came after separate talks last week with German, Dutch, Belgian and French banks on the rollover. “The German government welcomes it when proposals come from the private sector, including those on private-creditor participation that are now coming out of France,” German Finance Ministry spokesman Martin Kreienbaum told reporters in Berlin today. Talks with German financial institutions are ongoing, he said.

Several Options

The French proposal was only one of several options being studied by financial companies and it was unclear whether an agreement could be reached this week, Deutsche Bank AG Chief Executive Officer Josef Ackermann told Reuters today at a conference in Frankfurt.

The French plan, which includes a guarantee fund as an incentive for banks to take part, has been compared to the Brady Bond plan, named after U.S. Treasury Secretary Nicholas Brady, that was used designed in 1989 to help resolve Latin America’s debt crisis. In that case bondholders who swapped their debt for longer-maturity bonds were offered a guarantee they would be repaid. To back up that guarantee, the Latin American governments bought U.S. treasury bonds that were held in escrow.

‘Glib’ Comparison

“Brady bonds carried a guarantee,” said Ciaran O’Hagan, head of European rates strategy at Societe Generale SA in Paris. “In this case the guarantee is intrinsic, but with Brady Bonds it was given by the U.S. government. I think it’s glib, people are fishing for a description. We don’t have many details so it’s still early days.”

Negotiations shifted to Rome today where Director General of the Treasury Vittorio Grilli hosted representatives of some of the world’s biggest banks. Grilli chaired the meeting in his capacity as the head of the European Union’s Economic and Finance Committee, which helps prepare policy for European finance ministers.

He met with a group of bank executives, representatives of the euro zone and the European Central Bank and Charles Dallara, managing director of the Institute of International Finance, which represents more than 400 of the worlds’ biggest financial services companies. Dallara, a former U.S. Treasury official, worked on the original Brady Bond plan.

The participants “engaged in a constructive exchange of views on Greece and progress was made in advancing the discussions,” Dallara said in an e-mailed statement.

To contact the reporter on this story: Aaron Kirchfeld in Frankfurt at Helene Fouquet in Paris at

To contact the editor responsible for this story: Frank Connelly at

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