Eurozone Squabbles Over Greek Rescue

Schaueble’s call for private creditor involvement rebuffed by ECB

Eurozone nations weighed in on the Greek financial crisis as the International Monetary Fund (IMF) and European Central Bank (ECB) rejected the involvement of private creditors, lest ratings agencies see their cooperation as coerced and term the measure a default.

As previously reported by AdvisorOne.com, Wolfgang Schaueble, Germany’s finance minister, had proposed in a letter to Jean-Claude Trichet, president of the ECB, that private bondholders exchange their bonds for new ones with a longer repayment schedule to allow Greece more time to recover from its debt woes.

Reuters reported late Thursday that Trichet rejected the idea at the ECB’s monthly news conference, saying, "We exclude all concepts which would not be purely voluntary, without any elements of compulsion. We call for avoiding any credit event and selective default. And of course, default." The ECB has warned that if a restructuring occurred, it would stop accepting Greek debt as collateral. Such an action would throw Greece’s banking system into disarray.

Also on Thursday, ratings agencies had said that it might be impossible for such an exchange to be carried off in a truly voluntary manner, warning that they would consider exchange under coercion a default. They had already expressed concern over the proposal earlier in the week. Moody’s Investors Service went further, saying that a Greek default could affect the ratings of bailed-out Ireland and Portugal as well.

Other nations are expressing reservations about the structuring of Greece’s rescue as well. Austrian Finance Minister Maria Fekter told Austrian magazine Format in an article published on Friday that her nation’s aid to Greece would stop if the IMF felt the country was not deserving of another bailout.

"If the IMF stops helping Greece because it believes that the progress made in the country is not good enough then Austria will also not pay anymore," she said in the report. "For us it is clear that without the IMF, there will be no more payouts." She added that allowing Greece’s debts to be canceled or the country itself to default were "out of the question."

French officials have said that they could only agree to private sector rollovers on a strictly voluntary basis; otherwise there would be broader damage to euro zone markets.

In the end, however, euro zone nations themselves will likely decide whether to allow debt rollovers. Germany has voted in favor of it, and a number of large banks, which hold substantial amounts of Greek debt, have expressed willingness to participate. A number of other euro zone nations, including Finland and the Netherlands, also support such a plan, particularly since taxpayers are rebelling at the idea that banks should escape unscathed in rescues that place heavy burdens on taxpayers.

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