A German-inspired plan to reschedule Greek debt could force eurozone governments to provide up to an extra €20bn to avoid a meltdown of its financial sector, European finance ministers have been warned.
A briefing paper circulated by the European Commission, and seen by the Financial Times, warned the extra money may be needed to recapitalise Greek banks following a proposed maturity extension of Greek government bonds, which would be classified by rating agencies as a “selective default”.
A further cash reserve may be required for emergency Greek bank liquidity if the European Central Bank refuses to accept downgraded bonds as collateral. Ministers have been told all the Greek collateral – some €70bn – might have to be replaced.
Opponents of Greek default, led by Europe’s central bankers, warned of the German debt exchange plan’s drawbacks.
“If despite everything you try to reduce the debt and you provoke a risk of default, you’ll have to finance the entire Greek economy,” said Christian Noyer, Bank of France governor.
“All in all, the costs seem to outweigh the benefits,” said Mario Draghi, incoming ECB president. The ministers, meeting in Brussels on Tuesday, are looking to involve private creditors in a new Greece rescue programme, to gain parliamentary support in countries such as Germany, the Netherlands and Finland without precipitating a disorderly default by Athens.
Ministers are considering three options for private sector involvement, which have been set out in a document circulated by the European Commission.
The most drastic is for a voluntary debt exchange, involving an extension of maturities on Greek government bonds to buy time for Athens to cope with its debt crisis. Wolfgang Schäuble, German finance minister, suggested a seven-year extension.
European officials calculate a successful debt exchange with 100 per cent participation would “virtually eliminate the need for official financing” for the next five-and-a-half years, on top of the €57bn still to be paid from Greece’s €110bn rescue programme agreed last year.
But the plan could also leave the eurozone responsible for propping up Greece’s financial system.
The second and third options are for a voluntary “rollover” of bonds, less likely to trigger a bond downgrade, and therefore favoured by the ECB and France, in particular.
One would be a co-ordinated rolling-over of bonds at maturity, probably organised by Athens itself, and designed to enable the broadest possible participation. The third option, likely to contribute the lowest level of private creditor participation in any rescue plan, is for an informal rollover of bonds.