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French plan offers hope amid Greek debt disaster

German banks voice interest in proposal to roll over country's maturing bonds in attempt to avoid default

Stefano Bernabei and Emmanuel Jarry

Published 28/06/2011 | 05:00

French President Nicolas Sarkozy
French President Nicolas Sarkozy

French banks, the most exposed to the Greek debt crisis, have reached an outline agreement to roll over holdings of maturing Greek bonds as part of a wider European plan to avoid sovereign default.

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French President Nicolas Sarkozy confirmed the breakthrough yesterday and German bankers voiced their interest in the "French model".

The news came as international bankers met eurozone policymakers in Rome to discuss how the private sector can share the burden of a second rescue programme for Greece.

That meeting, which focused on the French plan and other options, ended without decisions, but an Italian Treasury official said none was expected at this stage.

Charles Dallara, managing director of the International Institute of Finance, a banking lobby, said in a statement participants "engaged in a constructive exchange of views on Greece and progress was made in advancing the discussions".

Mr Sarkozy told a Paris news conference that French banks would be offered 30-year Greek bonds with a coupon equivalent to the eurozone's lending rate to Athens, plus a premium based on Greece's future economic growth rate.

Government sources said banks had offered to reinvest 70pc of Greek debt maturing in 2011-14. The other 30pc would be cashed out.

Rescue

Of the amount reinvested, 50pc would go into the 30-year bonds and the remaining 20pc would go into zero-coupon AAA bonds that could be issued or guaranteed by the eurozone rescue fund, the sources said.

The bonds might pay about the 3pc interest which the European Financial Stability Facility pays to borrow in the market, but interest payments would be withheld, accumulated and paid when the bonds expired, they said.

The new bonds would be placed in a Special Purpose Vehicle, effectively removing Greek debt from the balance sheets of participating banks, the sources said.

Private banking sources said the bonds could be guaranteed by the eurozone's rescue fund or the European Investment Bank.

However, a French government source called the scheme "a sort of private Brady bond without a public guarantee", in a reference to a 1989 swap of Latin American debt for tradeable securities, some of them guaranteed, proposed by then US Treasury Secretary Nicholas Brady.

European Union leaders agreed last week that extra public financing to help Greece avoid bankruptcy would depend on the voluntary involvement of private-sector bondholders in a way that did not cause a "credit event" and that credit ratings agencies did not brand as a selective default.

At least 20 international bankers went to the Treasury for talks with Italian Treasury chief Vittorio Grilli and European Commission officials. Mr Grilli chairs the Economic and Finance Committee, which prepares decisions for eurozone finance ministers.

A German banking source said that a call was planned for yesterday between banks and the German finance ministry to discuss their contribution to a Greek bailout.

Compromise

The Association of German Public Banks said in a statement: "We are looking at the French model with interest."

A source close to German banks added: "The French suggestion would be a possible compromise, which on the one hand underscores the voluntariness of a maturity prolongation and should prevent triggering a credit event, while on the other hand also granting reasonable incentives so private creditors can accept it."

But the head of Germany's biggest commercial bank, Deutsche Bank, which has only a tiny holding of Greek debt, warned against rushing a deal on private-sector involvement.

"Political leaders expect a solution by the end of the week, but we should not rush it," Deutsche CEO Josef Ackermann said.

"It is important to have a good solution. The issues are complex and need discussion."

Irish Independent

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