Trichet Gives First Signal Endorsing Greece Bond Rollover

European Central Bank President Jean-Claude Trichet signalled for the first time he may support encouraging investors to buy new Greek bonds to replace maturing securities as officials seek to stem the nation’s debt crisis.

While Trichet said he’s against imposing losses on creditors, he indicated he’d approve of financial institutions maintaining their level of outstanding credit. “That is not a default,” he said at an event in Montreal late yesterday. “That is something the ECB would consider appropriate.”

ECB policy makers have opposed any measure that could be classed as a default to avoid what European Union Economic and Monetary Affairs Commissioner Olli Rehn described yesterday as a “Lehman Brothers catastrophe.” The ECB is considering a rollover of bonds as an alternative means of easing Greece’s funding squeeze, two officials familiar with the matter said last week, on condition of anonymity.

The euro rose against the dollar after Trichet’s comments and traded at $1.4666 as of 12 p.m. in London, up 0.6 percent on the day. The yield difference, or spread, between 10-year Greek bonds and German securities of a similar maturity was at 1,286 basis points today, up from 1,282 yesterday.

‘Not Appropriate’

With dissent over austerity measures rising in Athens, Greek Prime Minister George Papandreou said yesterday that he would consider using a referendum to forge social consent for his adjustment plans. Finance Minister George Papaconstantinou today pledged to speed up asset sales and said plans for a deficit of about 1 percent of gross domestic product in 2015 will be submitted to parliament in coming days.

Under the plan being discussed by European officials, investors may be given preferred status, higher coupon payments or collateral as incentives to roll over the holdings when they mature, two separate officials, who declined to be identified because the talks are in progress, said last week.

A Greek debt swap offering investors terms “worse” than those of the existing securities would constitute a coercive or distressed exchange, and be considered a default, Fitch Ratings said in a statement yesterday. Another criterion for assigning a default rating is that the exchange “is, or appears to be, necessary to avoid insolvency and/or illiquidity,” Fitch said.

‘The Wealthiest’

For its part, so long as management of Greece’s economy is improved and the government conducts credible asset sales, the ECB doesn’t see “a need for a restructuring or for haircuts, and we would say that it is not appropriate,” Trichet said.

ECB Governing Council member Nout Wellink of the Netherlands also said yesterday that a debt rollover may form part of a new aid package. “I don’t rule out that a part of the additional refinancing can come from that source,” Wellink said at a panel discussion in Amsterdam.

Greece yesterday unveiled the first step in a privatization program that aims to raise 50 billion euros ($73 billion) from state-asset sales and real-estate development up to 2015.

Greece “is a country which to my knowledge, as a proportion of GDP, is probably the wealthiest in terms of assets in real estate,” Trichet said. “That is, of course, something which is important. And, of course, if fully understood by observers and investors and market participants, might make a difference provided, of course, that this privatization appears to be credible and processed in a professional manner.”

‘Serious Situation’

Trichet said that, along with asset sales, “the macro policy, the fiscal policy, as well as the cost policy in the country, in the economy has to be improved drastically.”

“For the rest of it, we will see exactly how the International Monetary Fund on the one hand and the Europeans on the other hand, will bring about their own contributions,” he said.

Papandreou, who ruled out early elections and any question of abandoning the euro as a currency, said his priority was to prevent the country’s bankruptcy and called on political parties to support his push to change the country, according to an e-mailed transcript of comments in a Cabinet meeting in Athens.

Rehn said in Strasbourg late yesterday that the EU faces a “very serious situation” on Greece, and needs to reach an accord on the matter before finance ministers meet on June 20.

“Greece was in a freefall in fiscal terms, was facing a default last April, May and unfortunately again is facing a default unless there is help,” Rehn said. “Let’s recall there has been no Lehman Brothers catastrophe on European soil. We have to make sure that there is not a Lehman Brothers catastrophe on European soil.”