Friday 22 September 2017

Debt Crisis: Spain discusses state bailout, ECB seen writing off Greek debt

Mario Draghi, President of the European Central Bank (ECB). Photo: Reuters
Mario Draghi, President of the European Central Bank (ECB). Photo: Reuters

Jan Strupczewski

SPAIN has at last conceded it may need a state bailout and policymakers are considering writing down Greek debt to their central banks, European officials said today, as markets anticipated radical new action to pull the continent out of its debt maelstrom.

The crisis in the euro zone has been thrown into higher gear by a surge in borrowing costs for Spain and by an acknowledgement by Brussels officials that Greece is too far off its targets to be saved by its second bailout package, agreed just five months ago.

Spain, the next country in the firing line, is far larger than the four other countries that have accepted EU bailouts and rescuing it would require action on a scale as yet unforeseen.

It may be a price that needs paying to save the single currency, analysts say.

Though far smaller, Greece has the potential to send shockwaves across the region should it default on its debts and leave the euro.

The European officials on Friday described a further restructuring of Greek debt as a last chance to restore the country to solvency.

A euro zone official said Economy Minister Luis de Guindos had brought up the prospect of a €300bn bailout this week at a meeting with Germany's Finance Minister Wolfgang Schaeuble..

The official spoke on condition of anonymity because he was not authorised to brief.

"De Guindos was talking about €300bn for a full programme, but Germany was not comfortable with the idea of a bailout now," the official said.

He said the question would be put off until the euro zone's new, permanent bailout fund, the European Stability Mechanism, is up and running.

He also said that Germany appeared to be softening its opposition to giving the ESM a banking license, which would allow it to borrow money and deploy more firepower if called upon to rescue an economy as big as Spain's.

Madrid has already accepted a lifeline for its banks while insisting publicly that it does not need a rescue for its state finances.

But with its borrowing costs breaching levels that forced Greece, Portugal, Ireland and Cyprus to seek bailouts, it could have little choice but to seek emergency financing.

Asked about the European source's comments, a Spanish government spokeswoman said: "We strongly deny any such plan.

This possibility (of a €300bn rescue for Spain) has not been looked at and has not been discussed."

News that policy makers were considering having central banks write off some of their Greek debt was another sign of radical measures contemplated behind the scenes.

Private sector holders of Greek debt already wrote off most of the value of their holdings this year in history's biggest sovereign debt restructuring, agreed alongside a €130bn second package of EU, IMF and ECB loans to rescue Athens.

But officials said there was now a recognition that Greece remains too far off its reform targets to pull itself out of the crisis while its economy, in its fifth year of recession, shrinks ever faster, eroding its ability to pay its debts.

That increases the likelihood of official lenders writing down their loans, known as "official sector involvement" or OSI.

"If I were to assign a percentage chance to OSI in Greece happening, I would say 70pc," one euro zone official involved in the deliberations told Reuters.

One option being worked on would involve the ECB and the national central banks that make up the Eurosystem - the single currency's architecture - writing down the value of the Greek government bonds they hold by 30 percent.

Total outstanding official debt to Greece is about €220bn-€230bn. One official said the proposals would reduce that by about €70bn. Another put the figure at €70bn-€100bn.

Markets remained focused on Friday on the prospect of intervention by the ECB.

Reuters

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