As pressure mounted to come up with a solution to the Greek debt crisis, German Chancellor Angela Merkel called for private investors to kick in. Strategies being discussed include several options, such as a repurchase of bonds or a swap in which they are exchanged for cuts in face value.
Reuters reported that Merkel said Sunday, “The more we can involve private creditors now on a voluntary basis, the less likely it is that we will have to take next steps.” She did not specify what those next steps might entail. However, losses by private investors are beginning to look inevitable.
Wolfgang Franz, head of Germany’s “wise men” economic advisers to the government, said that the very size of Greece’s debt made it “inevitable and justified” that private bondholders absorb some losses. He was quoted saying over the weekend, “One possibility would be that the current EFSF euro rescue mechanism swaps—at a significant discount—Greek bonds into bonds it issues and guarantees.”
European officials and private bondholders have been discussing for three weeks ways in which Greece might get a second bailout, but there has been no agreement. The commercial bank lobby said on Sunday, however, that talks were progressing. In a short statement, the Institute of International Finance said, “Progress has been made and the discussions are continuing,” adding that the talks centered around “several options related to Greece’s financing needs and longer-term debt sustainability.”
A summit meeting is planned for Thursday in Brussels, according to an announcement made by European Council President Herman Van Rompuy last week. Merkel has said she will not attend unless a rescue plan has been developed, despite the fact that she characterized the meeting as “urgently necessary.” She was quoted saying, “I will only go there if there is a result.”
Plenty of obstacles litter the road to a solution, not the least of which is the opposition of the European Central Bank (ECB) to any solution that involves a default rating for Greece; ratings agencies have said they would regard involvement of private investors, voluntary or not, as a default since the likelihood of their participation as truly voluntary is highly doubtful.
There is a ray of hope, however; Jean-Claude Trichet, president of the ECB, put forth the notion that there might be a way in which a default could be managed smoothly. If the ECB stopped accepting defaulted bonds as collateral, countries would have to come up with some other form of acceptable collateral. He was quoted saying, “The governments would then have to step in themselves to put things right …The governments would have to take care the Eurosystem is presented with collateral that it could accept.”