July 19, 2011

For Greek Debt Crisis, Bank Tax Among Measures Proposed

Longer-term loans with lower interest rates also an option

Two days before a summit meeting in Europe to discuss a second rescue package for Greece, a confidential paper outlined some of the strategies being considered to stem the tide of debt. These strategies included a tax on euro zone banks and loans with longer terms and lower rates.

Reuters reported that the paper also indicated that other strategies remained in consideration, including those that could trigger default—either selective or full. Detailed proposals are to be discussed on Wednesday, with finance ministers intending to determine a course of action in Thursdays meeting that will not only deal with Greece but will also halt the spread of contagion in the euro zone.

Jean Leonetti, European affairs minister for France, said in the report that the bank tax was one of several options under consideration. It would allow the euro zone to raise money to help with the bailout. Since it would avoid many of the consequences of other possibilities, it "deserved to be studied," he said, continuing, "It's one of the solutions we are looking at. It would have the advantage of not making us intervene directly with the banks and therefore potentially not triggering a default."

A source close to the talks said that such a measure could bring in 10 billion euros ($14.178 billion), and in three years could raise the total of 30 billion euros advocated by Germany, which has been pushing the principle of private sector involvement. One drawback is that the tax would be levied on banks with and without exposure to Greek debt, although the source said there was a way to structure it so that banks with exposure paid the most. He did not elaborate on how this could be done.

This was the only option contained in the paper that was unlikely to cause a determination of default. The other options are convincing Greek banks to commit to rolling over their government debt holdings, and extending the maturity and lowering the interest rate on euro zone loans to Athens.

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