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Greek Default Not ‘Worst’ Outcome for Banks as Options Mulled

IIF Managing Director Charles Dallara
Charles Dallara, managing director of the Institute of International Finance. Photographer: Daniel Acker/Bloomberg

July 7 (Bloomberg) -- Greek creditors may be willing to risk a planned and managed default to help resolve the nation’s debt crisis, said the head of the world’s biggest group of international financial companies.

“It may well be that some rating agencies reach judgments that involve a selective default,” Charles Dallara, the managing director of the International Institute of Finance, said in a Bloomberg Television interview yesterday. “I don’t think that a temporary period of selective default as it has been narrowly framed for sovereigns in the past is necessarily the worst thing that could happen here.”

His comments, which contrast with the opposition to default by the European Central Bank, European Union and Greece itself, came as Germany revived a proposal for a bond swap to lengthen Greek debt maturities. The Germans dropped that suggestion two weeks ago after it was rejected by the ECB.

Dallara met with about 20 banks and insurers in Paris yesterday to examine proposals to roll over maturing bonds into new Greek securities. The discussions included a plan floated last week by French banks to roll over 70 percent of bonds maturing by mid-2014 into new 30-year Greek securities backed by AAA-rated collateral, as well as other proposals, Dallara said.

Bonds in high-debt European nations tumbled yesterday after Portugal was downgraded to junk status, adding to concern Europe’s debt woes will continue to ripple beyond Greece. The extra yield investors demand to hold Portugal’s 10-year bonds over German bunds surged 148 basis points to a euro-era record 949. The yield on Italy’s 10-year bond reached the highest in almost three years, while Ireland’s two-year yield topped 15 percent for the first time.

‘Fingers Crossed’

The turmoil hasn’t deterred German leaders from insisting that private creditors need to play a substantial role in further rescues.

“The market has thought some debt forebearance was inevitable from day one, and we are keeping our fingers crossed that any restructuring, whether it is called that or not, will not lead to contagion and a global market meltdown,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. “This is looking increasingly like a true default.”

German Finance Minister Wolfgang Schaeuble told reporters in Berlin yesterday he sees “many arguments in favor of alternatives” to the French banks’ proposal, after it became clear that ratings companies viewed the plan as likely to trigger default.

Avoiding Default

European Union officials and the ECB have insisted that private-sector participation be designed to avoid any kind of default status for Greece, however short-term.

“We stick to our objective and continue working with the private sector and partners in the Eurogroup on a private sector involvement scheme that contribute significantly to the successor program for Greece while avoiding that selective default,” EU economic spokesman Amadeu Altafaj said in an e-mailed statement yesterday.

ECB President Jean-Claude Trichet said last month that pushing private-sector involvement would be an “enormous mistake” for the euro region. While the ECB has said it could accept a plan under which creditors voluntarily agree to buy Greek bonds to replace maturing debt, Trichet said the ECB has no intention of rolling over its own Greek holdings.

The ECB is lending unlimited amounts of cash to support banking systems and has relaxed collateral requirements. In May 2010, it took the unprecedented decision to start buying the bonds of distressed nations in an effort to calm markets as Greece’s fiscal woes began to infect other euro-area members.

Not ‘Credible Threat’

Investors are betting that Trichet will maintain efforts to support Greek banks, no matter the debt rating, said David Owen, managing director at Jefferies International in London.

“The ECB can kick and scream but it has to keep pumping in liquidity or the Greek banking sector goes down and we have contagion,” Owen said. “Trichet won’t want to be remembered as contributing to an absolute disaster so it’s not a credible threat and that’s the way the market views it.”

Bankers participating in the Greece talks said that any solution will have to win the backing of European authorities before it can proceed.

“There is a need to try finding a solution that avoids a default, because we have been asked by the authorities for a plan that does not lead to a default,” said BNP Paribas SA Chairman Michel Pebereau in an interview on BFM radio yesterday. “Different solutions have been put on the table.”

‘Noise’ of Moment

Pebereau said the Greek case is “different” from that of Portugal and Ireland, when asked about the risk of contagion. The IIF’s Dallara also said financial markets will, over time, recognize that Greece faces a different set of problems than Ireland or Portugal, which also needed aid from the European Union and International Monetary Fund.

“Markets will be able over time to detach a little bit from the noise of the moment,” he said.

Dallara, 62, said a voluntary program to involve banks, insurers and other bondholders needs to be accompanied by efforts, such as a bond buyback program, to retire Greece’s debt, which amounts to about 150 percent of gross domestic product. He said investors and authorities should step back and consider a broader set of options than the bondholder proposals discussed recently.

“What’s at stake really continues to be, I think, the global economic recovery,” Dallara said. “I am increasingly confident that the efforts underway recognize the severity of the stakes.”

To contact the reporters on this story: Rebecca Christie in Brussels at; Olivia Sterns in London at

To contact the editors responsible for this story: James Hertling at;

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