Deal on Greek Debt Bailout, as Germany Relents to French Demands

Private creditors to participate ‘on a voluntary basis,’ says Merkel

German Chancellor Angela Merkel and French President Nicolas Sarkozy came to agreement on a second bailout for debt-troubled Greece with Germany backing down on its stance that private investors must be compelled to share losses. Sarkozy said that there was a need for haste in putting a package together, and said that France and Germany took the same position.

Reuters reported that the two leaders met in Berlin on Friday to discuss involvement of private investors in any rescue package; that has been a large obstacle on the road to an agreement, since ratings agencies regard any such element as an involuntary restructuring and have warned that they will rate Greece accordingly.

Prior to their meeting, German Deputy Foreign Minister Werner Hoyer said in the report, "I believe the meeting today will yield a solution. I am sure that they will come to a compromise." At the end of the discussion, Merkel and Sarkozy together announced their agreement.

The New York Times reported Merkel saying, “We would like to have a participation of private creditors on a voluntary basis. This should be worked out jointly with the E.C.B. There shouldn’t be any dispute with the E.C.B. on this.” Sarkozy termed the change of stance on the part of Germany “a breakthrough.”

Analysts viewed the outcome as positive for the market. Andre Bakhos, director of market analytics at Lek Securities in New York, said in the report, "After a couple of volatile sessions earlier this week, the market is taking Sarkozy's words as comfort and that is translating into a rebound this morning."

Much remains to be worked out; Peter Boockvar, equity strategist at Miller Tabak & Co. in New York, was quoted saying, "To convince existing Greek bondholders to buy new Greek debt is going to be a gargantuan process. But the market will deal with that later. For today they're just happy that the French, Germans and the ECB [European Central Bank] look like they're coming to some sort of an agreement."

While Germany has given ground, Merkel will not be popular at home for her change in position. Northern countries that backed Germany's former hard-line stance regarding private creditors may still object to the agreement. Speculation that Merkel was stalling for time on a decision for Greece's rescue met with denial. She said she wanted “a solution as quickly as possible,” and raised the possibility that the new package would be decided by July.

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