By James G. Neuger and Jonathan Stearns – Oct 4, 2011
European governments hinted that bondholders may be saddled with bigger losses on Greek debt, intensifying market jitters that a second aid package designed to quell the fiscal crisis might unravel.
Finance ministers in Luxembourg considered recrafting a July deal that foresaw investors contributing 50 billion euros ($66 billion) to a 159 billion-euro rescue. The debt exchanges and rollovers targeted bondholder losses of 21 percent.
“We have to recalculate what that will actually cost and how to deal with it, but that is not being discussed now because we haven’t had the report from Greece yet,” Austrian Finance Minister Maria Fekter told reporters today at a meeting of European officials.
Together with plans to get more firepower out of the region’s 440 billion-euro rescue fund, the review of Greece’s aid package was a response to growing international frustration with Europe’s inability to get to grips with the crisis after 18 months of incremental steps marked by clashes between Germany, France and the European Central Bank.
European stocks fell for a third day and investors shunned riskier countries’ bonds amid concern that the crisis is careening out of control. The euro has dropped about 8 percent since the end of August, trading at $1.3182 as of 1:30 p.m. in London.
Europe’s financial leaders are fighting on multiple fronts, trying to repair Greece’s recession-struck economy while insulating Italy and Spain and shoring up banks that the International Monetary Fund says face as much as 300 billion euros in credit risks.
The stress on banks in Europe’s better-off economies was in the spotlight today with shares in Dexia SA, a French-Belgian lender, plunging on concern it will require a second bailout. The French and Belgian governments vowed “all necessary measures” to protect clients and will guarantee all Dexia’s loans.
A seven-hour meeting of euro-area finance chiefs yesterday yielded an agreement to pursue “technical revisions” to the July accord on private sector burden-sharing, Luxembourg Prime Minister Jean-Claude Juncker told reporters early today. He spoke of “changes” to the Greek outlook that spurred the reassessment.
Juncker gave no details about a possible recalibration of the “voluntary” debt exchange, the new element in the follow- up package hammered out after last year’s 110 billion-euro lifeline failed to stabilize Greece. The Institute of International Finance industry group estimates that the debt swap, still being negotiated, will amount to a writedown of 21 percent.
“No, no,” Spanish Economy Minister Elena Salgado told reporters today when asked about deeper writedowns. “I insist: no.”
European leaders have gone back and forth over the sanctity of bond contracts as the crisis escalated. A November 2010 pledge to rule out writedowns unravelled a month later, only to be reaffirmed in July. The latest about-face came after seven countries including Germany, Europe’s dominant economy, weighed calling for Greek writedowns of as much as 50 percent, two European officials said.
“The reopening is probably going to be quite bad for the markets,” said Peter Schaffrik, head of European interest-rate strategy at Royal Bank of Canada’s RBC Capital Markets in London. “There is a big dent to European credibility.”
The ministers also pushed back a decision on the release of Greece’s next 8 billion-euro loan installment until after Oct. 13. It was the second postponement of a vote originally slated for yesterday as part of the 110 billion-euro lifeline granted to Greece last year.
Scrounging for savings, the Greek cabinet on Oct. 2 announced 6.6 billion euros of cuts, mostly by slashing public payrolls. Greece will “very likely” have to make extra reductions for 2013 and 2014, a two-year phase that will be the focus of the rest of the review by European Union, European Central Bank and IMF officials, EU Economic and Monetary Commissioner Olli Rehn said.
Greece’s revised 2011 deficit goal may be 8.5 percent of gross domestic product compared with a previous target of 7.6 percent, Rehn said. He called the new target “plausible” and lauded Greece’s “important steps” toward further savings next year.
While an Oct. 13 meeting to decide on the next payout was canceled, Juncker said he is “nevertheless optimistic when it comes to the issue of the disbursement” by the end of October. The decision now dovetails with an Oct. 17-18 summit of European government leaders to address the crisis. Juncker said Greece can pay its bills in the meantime.
“Greece is not the scapegoat of the euro zone,” Greek Finance Minister Evangelos Venizelos said yesterday. “Greece is a country with structural difficulties.”
Finance ministers held a first discussion over how to further enhance the region’s rescue fund, setting aside a plea by German Finance Minister Wolfgang Schaeuble to postpone that debate until the remaining countries have endorsed the fund’s latest upgrade.
Fourteen of the 17 euro countries have approved the reinforcement, which will empower the European Financial Stability Facility to buy bonds on the primary and secondary markets, offer precautionary credit lines and enable capital infusions for banks.
Juncker announced “good progress” on the credit lines and bank-recapitalization tools. Avoiding the word “leveraging,” he said work is under way to scale up the fund’s capacity without requiring each country to chip in more.
“We are checking if yes or no we could increase the efficiency of the different instruments,” Juncker said. Asked whether the ECB would be tapped to boost the fund’s clout, he said: “I don’t think that this will be the main avenue of our considerations.”
The ministers also smoothed a snag en route to a second Greek package by settling the terms under which collateral will be offered to AAA rated Finland, home to a euro-skeptic movement that catapulted to third place in April elections by opposing further bailouts.
While the party now known as “The Finns” didn’t make it into the ruling coalition, it captured the Finnish mood and hardened the stance of new Prime Minister Jyrki Katainen in the euro-rescue bartering.
Under the accord, Greek bonds will be transferred from Greek banks to a trustee, which will sell them and invest the proceeds in AAA rated bonds with maturities of 15 to 30 years.
In exchange for the special treatment, Finland will speed its payments into a planned permanent rescue fund and forego a share of profits from EFSF emergency loans. Collateral wouldn’t cover its entire Greek exposure. In the event of default, it couldn’t cash in on the collateral until Greece’s official loans mature, a wait that might last 30 years.
“It’s a complicated financial structure,” said EFSF Chief Executive Officer Klaus Regling, who brokered the collateral arrangement. He and Juncker said Finland is the only country likely to take advantage of it.
Regling deserves “the Nobel prize for economics or the Nobel peace prize” for engineering the compromise, Rehn said.