June 6, 2011 8:44 pm

Greek debt rollover initiative gathers steam

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A majority of holders of Greek government bonds may be prepared to voluntarily roll over the country’s debt in a move that would not spark a default, analysts said, easing the way towards a second bail-out for Greece.

ING Financial Markets estimates that 55 per cent of holders of the more than €250bn ($365bn) of Greek bonds may be willing to participate in such a move.

The findings came as a European Central Bank official warned Berlin against misguided attempts to secure private sector involvement in eurozone bail-outs.

Critically, a rollover of Greek debt would only be supported by the ECB if it did not lead to a default by rating agencies, or a credit event or pay-out in credit default swaps, which insure investors against default.

The ECB fears that German attempts to force investors to extend the maturities of their bonds could prompt a default and a credit event, as such a move would involve a change in the terms of the bond agreement and losses for investors.

A voluntary rollover of debt – whereby investors reinvested their money in fresh bonds at prevailing market rates – would not involve losses and would therefore not be a default or involve these private creditors in a de facto bail-out, according to an official at one rating agency. Speaking in Berlin, Lorenzo Bini Smaghi, executive board member of the ECB, said involving the private sector in preventing and resolving sovereign crises was a good idea.

“However, the practical implication of this idea is fraught with complications and, if done unwisely, may actually be very damaging, and turn out to be more costly for taxpayers.”

He said that Germany’s view – that there should be no eurozone country debt restructuring before 2013, when a permanent European bail-out fund was in place – did “little to reassure investors, as it implies there might be one afterwards”.

Mr Bini Smaghi said problems emerged when a debt restructuring was used as a preventive tool rather than a last resort. One risk was that it would put the eurozone at odds with the rest of the world and the bloc would be seen “as handicapping itself”.

He added: “This is how a good idea can turn into bad practice. Continuing to pursue it suggests strong masochistic tendencies.”

The ECB fears that a default or a credit event in Greece would lead to contagion.

Padhraic Garvey, global head of rates strategy at ING, said: “A rollover plan would save Greece some €30bn a year, but there would still be a funding gap that would have to be filled by more loans from the EU.”

Greece has to meet bond redemptions of about €60bn in 2012 and 2013 before the European Stability Mechanism, which will force private investors to share the burden of defaults, comes into effect.

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