Germany Sees Deal on Greek Aid, Aims to Avoid Bond-Swap Delay

Angela Merkel Greece
Angela Merkel at the chancellory building in Berlin on Feb. 17, 2012. Photographer: Michele Tantussi/Bloomberg

Germany expressed confidence that euro-area governments will agree on a 130 billion-euro ($171 billion) rescue for Greece within days, while seeking to keep a bond swap of the nation’s debt on track.

German Chancellor Angela Merkel, Italian Prime Minister Mario Monti and Greek Prime Minister Lucas Papademos discussed plans for a second Greek bailout in a conference call today and are optimistic that euro-area finance ministers will “find a solution to open questions” when they meet on Feb. 20, Steffen Seibert, Merkel’s chief spokesman, said in an e-mail statement.

Signals of progress on renewed aid for Greece follows wrangling among euro-area finance ministers that raised the prospect of a bailout delay. Germany, the biggest contributor to euro-area aid, wants to avoid splitting the rescue and the bond swap, lawmakers in Merkel’s coalition who were briefed by German government officials said yesterday.

“We expect the Greeks to rise to their responsibilities,” German Deputy Finance Minister Steffen Kampeter said in a speech to lawyers in Hamburg yesterday. “This coming Monday, we will see whether Greece delivers or whether we will be forced to decide on another course of action, one that is not desired.”

Conflict among the finance ministers on a Feb. 15 conference call over how to reduce Greece’s debt load and tighten control of the aid raised the prospect of a two-step process, according to two people familiar with the talks. In that scenario, the Feb. 20 gathering in Brussels would be limited to kicking off the bond exchange and deferring decision on the rest of the bailout funds.

Bond Redemption

As recriminations fly between Greece and its northern European creditors, the clock is ticking toward a March 20 bond redemption when Greece must pay 14.5 billion euros or trigger the first sovereign default in the euro’s 13-year history.

Merkel was distracted from her crisis-fighting agenda today when German President Christian Wulff quit, thrusting domestic politics to the forefront and prompting her to cancel a trip to Rome to meet Monti face-to-face.

The timetable of the Brussels gathering on Feb. 20 has now been brought forward to 3:30 p.m. in the Belgian capital instead of the usual 5 p.m.

Investors have sent the euro and global stocks higher as they anticipate the culmination of the seven-month effort to complete a second bailout for Greece. The currency rose 0.25 percent to $1.3163 as of 4:26 p.m. in Berlin after rising yesterday for the first time in five days.

Austerity Measures

While Greek lawmakers this month passed austerity measures that were required for the aid, the euro ministers wrestled with the latest setback, hearing on their call that Greece would miss debt-reduction goals. Without further measures to close the funding gap, Greece’s debt would fall to 129 percent of gross domestic product in 2020, missing a target of 120 percent, said three people familiar with the talks who declined to be named because they are still in progress. Last year, the level was about 160 percent.

European authorities are discussing charging the nation lower rates, the three officials said. Greece obtained its first, 110 billion-euro loan package in May 2010 at rates averaging 5 percent. Euro governments have already cut that figure once, to about 4 percent in March 2011.

Central bankers have also indicated that the ECB could funnel future profits from its Greek bond holdings to national governments and on into the crisis program. They have agreed that they “don’t wish to make a profit on Greece,” ECB Governing Council member Luc Coene of Belgium said this week. An ECB spokesman declined to comment.

Bond Losses

More controversial is a proposal for national central banks to take part in the private exchange by accepting losses on Greek bonds in their investment portfolios. France is virtually alone in backing that idea, one of the officials said.

The European Central Bank is swapping its Greek bonds for new ones to ensure it isn’t forced to take losses in a debt restructuring, three euro-area officials said. EU discussions on a proposal to set up an escrow account to ensure that Greek aid money goes to paying creditors are still under way, a Greek government official said in Athens today.

The multiple scenarios led to a possible two-step decision -- authorizing the bond exchange next week and then completing the 130 billion-euro public aid program -- that would raise political risks by requiring two votes in some national parliaments.

It would also turn a planned March 1-2 summit of European leaders into a showdown over Greece, after countries including the Netherlands and Finland called for delaying the full package until after Greek elections in April or later.

Bond Exchange

The bond exchange can only go ahead once governments authorize the European Financial Stability Facility to provide 30 billion euros, to be used in cash or collateral as an incentive to investors.

Euro officials are targeting a window of Feb. 22 to March 9 to complete the transaction, the German lawmakers were told. Greece will submit legislation to parliament on Feb. 21 to allow collective action clauses that could force bondholders resisting a debt swap to take part in the exchange, Naftemporiki reported, without citing anyone.

Greek leaders have no more “wiggle room” even as they seek to maintain a minimum level of public support going into elections that may take place in April, Deutsche Bank economists Gilles Moec, Marco Stringa and Mark Wall wrote in a note to clients yesterday.

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