GERMANY IS drawing up plans to restructure Greece’s sovereign debt in the event that Athens’s economic reforms fail to heave the country out of its budget crisis.
Its intentions fly in the face of the European Central Bank, which fears that asset writedowns could trigger a financial crisis at a time when the banking system is still bruised from the last one.
But Berlin reckons it and euro zone partners could avoid such desperate straits if they persuade Athens to offer bondholders a voluntary restructuring with tools used before by the International Monetary Fund.
One idea is to encourage bondholders to swap risky Greek sovereign bonds at about market prices for safer paper guaranteed by the euro zone – akin to “Brady Bonds” issued to South American countries in the 80s.
Alternatively, a euro zone trust – possibly the European financial stability facility – could buy bonds, and extend maturities or retire debt, a system used to help poor states in the IMF’s Heavily Indebted Poor Countries programme. People briefed about Berlin’s thinking said other options were considered but chancellery and finance ministry officials had spent time analysing these “market friendly” options.
“The government has long since started preparing for a Greek restructuring,” said one of them. “But it’s not pushing Greece into this. It knows that none of these plans will work if the Greeks don’t want them.”
The finance ministry said it could not comment.
George Papandreou, the Greek prime minister, announced new spending cuts and asset sales yesterday to get the country’s finances on track. He said a restructuring would not solve Greece’s problems. Although it would profit from a debt cut, Athens, like the European Central Bank, is wary of the damage even a voluntary scheme might do to domestic banks, which own a lot of its bonds, and to the government’s future access to markets.
But Germany has started making other noises. Werner Hoyer, deputy foreign minister, told Bloomberg News that a voluntary debt restructuring would “not be a disaster” and that Berlin was ready to back such a plan. – Copyright The Financial Times Limited 2011
