French banks mired in Greek debt agreed to a novel debt rollover plan as the euro zone grinds its way toward a new bailout for Greece, one that will live or die on the outcome of this week's crucial austerity program vote.
French President Nicolas Sarkozy revealed that major banks in France agreed to a rollover that would see them reinvest their Greek bond holdings in new issues with longer maturities. The plan is voluntary, though euro zone governments are putting enormous pressure on their banks to contribute to the rescue package for fear that Greece's inability to pay its debt charges would trigger a second financial crisis.
"If it wasn't voluntary, it would be viewed as a default, with huge risk of catastrophic results," Mr. Sarkozy said.
Plans to roll over Greek debt are being carefully designed to avoid a default rating by credit raters, since that would send shock waves through Europe's financial system.
Josef Ackermann, chairman of the Institute of International Finance and chief executive officer of Deutsche Bank AG, said it's unclear whether a broad rollover agreement can be reached this week. The Greek debt crisis, if not contained, would reverberate through the European and global economies. "If it is Greece alone, that's already big," he said. "But if other countries are drawn in through contagion, it could be bigger than [the 2008 collapse]of Lehman," he said at a Reuters banking conference Monday.
The French government hopes the plan, which requires formal approval, will form the blueprint for similar rollovers among banks in Germany, Austria, Switzerland, Belgium, Portugal and other countries holding potentially toxic Greek assets. German banks have the greatest direct ownership of Greek sovereign bonds, at an estimated $23-billion (U.S.), according to the Bank for International Settlements.
The banks have offered to reinvest 70 per cent of the Greek debt that is maturing over the next three years, starting with a €6.6-billion ($9.3-billion Canadian) bond redemption in August.
Of the amount to be reinvested, 50 per cent would be plowed into 30-year bonds with a coupon equivalent to the euro zone's lending rate to Greece, plus a premium indexed to gross domestic product growth. Twenty per cent would go into zero-coupon, triple-A rated bonds that could be issued or guaranteed by the European Financial Stability Facility (EFSF), which issues bonds to bail out euro zone countries that cannot roll over their debt.
The banks would cash out the rest of the bonds. Last week, debt strategists at ING Bank forecast that about two-thirds of the Greek bonds held by European banks would be rolled over. Since Greece redeems bonds worth about €30-billion a year, the amount would save the government about €60-billion over three years. The figure, however, is small compared to Greece's crushing overall debt of about €330-billion.
France's rollover proposal was one of only several options that were discussed Monday in Paris and in Rome, where Vittorio Grilli, director-general of the Italian Treasury, hosted meetings with representatives of some of Europe's top banks, the European Central Bank (ECB) and the IIF, the global association of financial institutions.
The possible EFSF guarantee, coupled with the GDP-indexed coupons "would probably prevent the rollover from triggering a credit incident, as well as encouraging a fairly high level of participation from investors," Deutsche Bank economist Gilles Moec said in a research note.
What rating the new Greek debt would carry is uncertain because exact details of the rollover are not available and because default ratings by the three main agencies - Fitch, Moody's and Standard & Poor's - are typically judgment calls.
The other arbiter of default is the International Swaps and Derivatives Association, which will have to determine whether the voluntary rollover would trigger a credit event, meaning there would be counterparty loss on credit default swap (CDS) exposures. A CDS is a form of insurance that protects the lender in case of loan default.
ING said it believes a voluntary debt rollover "is unlikely to be defined as an ISDA-defined credit event given that, in principle, it will not change the conditions of the previous obligation." Deutsche Bank had the same view.
While euro zone banks and governments hash out rollover plans, the socialist government of Greek Prime Minister George Papandreou faces a crucial test on Wednesday and Thursday, when parliament votes on the budget and the austerity program. If they are not passed, the European Union and the International Monetary Fund might not release the next €12-billion tranche of the €110-billion bailout negotiated by Athens a year ago. Unless the money arrives, Greece faces going broke in mid-July.
While most economists and debt strategists think the votes will go in Mr. Papandreou's favour, there is some chance his effort to save Greece from collapse will fail. He needs 151 votes to pass his deep austerity measures, which include a €50-billion privatization program. He has 155 seats in parliament, but two of his members have said they would not support the cutbacks.
The risk is that more of his members become mutinous. Strikes and protests are being called for the two voting days, which, analysts said, could influence any parliamentarians sitting on the fence.
Eric Reguly