Rehn insists there is no 'plan B' to prevent default
EU issues warning as Greek parliament votes on new economic austerity proposals
THE EU says there is no "plan B for Greece" and warned of immediate default if the country rejects economic austerity proposals in a vote today.
The debate in the Greek parliament is being shadowed in Rome, where France is brokering a deal with banks that hold Greek government bonds aimed at sharing the cost to Europe of a new bailout.
"To those who speculate about other options, let me say this clearly: there is no Plan B to avoid default," European Economics and Monetary Affairs Commissioner Olli Rehn said yesterday.
"The only way to avoid immediate default is for parliament to endorse the revised economic programme. They must be approved if the next tranche of financial assistance is to be released," Mr Rehn said.
About €12bn is due to be paid over to Greece next month by EU and IMF bailout lenders.
Before that, Greek parliamentarians have to vote to accept the conditions attached to a new €110m bailout; and European leaders have to lock banks that hold Greek government bonds into the deal by agreeing not to take cash from Greece as it falls due.
If Greece accepts the terms, European finance ministers and EU officials will vote to hand over the €12bn on July 3 and sign off on the entire Greek plan by July 11.
The bank element of the plan looks like it is falling into place.
A German proposal to create a commission, including the European Central Bank (ECB), lender countries and bank representatives, to hammer out a deal on the banks has been shelved in favour of a quicker process led by France.
Under the French government's proposal, private bondholders will agree to reinvest in Greek debt as the bonds are repaid over the next three years.
The bondholders would keep 30pc of the cash repaid but 50pc of the debt would immediately be reinvested in new Greek bonds not due to be paid back for 30 years.
The bonds will pay the same 5pc interest as Greece is paying for its bailout loans, plus up to 2.5pc extra if the country hits growth targets.
The remaining 20pc of the cash would be loaned back to Greece indirectly. Greece will get the cash, but the money will be owed to bondholders by an AAA rated European-backed bond issuer.
The scheme cuts the amount of new loans the European rescue funds and the IMF will have to find for the new Greek bailout. It does not cut Greece's overall debt burden, but gives the country a longer period before loans have to be repaid.
For banks, the deal is unattractive because it ties up cash for decades, but it keeps them in good stead with their home governments, who want the plan to succeed.
Analysts say the big ratings agencies and the ECB are likely to have been sounded out before details of the plan emerged.
European leaders are keen that the banking element of the Greek bailout is considered voluntary to avoid being classed as a default, which would hurt investor sentiment for other European counties.