June 8, 2011

Germany Puts Greek Debt Restructuring on Table

Schaeuble calls for private bondholders to kick in

In a letter to European Union (EU) nations, German Finance Minister Wolfgang Schaeuble urged countries to make private bondholders contribute to Greece's impending debt relief arrangement.

The letter, dated June 6, was reported by Reuters to say that supporting Greece demanded that bondholders make a "quantified and substantial" contribution. Addressed to the heads of the International Monetary Fund (IMF) and European Central Bank (ECB) as well as EU country heads, the letter said in part, "Such a result can best be reached through a bond swap leading to a prolongation of the outstanding Greek sovereign bonds by seven years, at the same time giving Greece the necessary time to fully implement the necessary reforms and regain market confidence."

Schaeuble specifically urged recipients to take stronger steps than the so-called Vienna Initiative that had earlier been proposed. If his advice is followed, it would amount to a restructuring, even if voluntary, of privately held Greek debt; as previously reported by AdvisorOne.com, ratings agencies have said that they would treat it as a default, which would impact Greece's credit rating.

On the news, the cost of insuring Greek debt rose again on Wednesday.

The letter comes ahead of a summit meeting of EU leaders on June 23-24. It is expected that the terms of a new bailout for Greece will be agreed upon at the meeting. Berlin has been pushing for private bondholders to share in the burdens incurred by bailouts otherwise funded by taxpayers. Constituents at home and some politicians have been pushing for private investors to have to absorb some of the losses.

Silvio Peruzzo, an economist at RBS in London, said in the report, "What Schaeuble is saying here probably goes beyond the solutions we've been hearing about in recent weeks. We know there are some parties in Chancellor Angela Merkel's coalition who are keen for a substantial involvement of the private sector."

Reprints Discuss this story
This is where the comments go.