Germany presses for private participation in Greek aid

1st June 2011, Comments 0 comments

Germany is pushing for private holders of Greek debt to participate in any new aid package for Greece, a finance ministry spokesman said on Wednesday.

Martin Kotthaus said Berlin had "strong expectations" regarding the issue, which has pit Berlin against the European Central Bank (ECB), which warns that forcing private investors to take part could devastate Greece's banking system.

But "if the public sector gives more" than the 110 billion euros ($158 billion) already agreed upon, "it is clear that private creditors must participate" as well, Kotthaus told a press conference.

While it was not clear what form of participation would be appropriate in Berlin's view, an often-cited possibility would be for holders of Greek debt to simply roll over, or renew, bonds when they came due.

This so-called "re-profiling" option would give Athens time to come up with the funds, if it can turn an economy now in recession around and begin posting primary surpluses.

Those are budget surpluses that do not include net interest payments on its debt.

Greece is now estimated to face a financing gap of around 60-70 billion euros in 2012-13, when the current EU-IMF loan begins to wind down, as it is unlikely that Athens will be able to refinance its debt on the markets as initially planned.

The German finance ministry spokesman explained that for Berlin to agree to more aid, three conditions must be fulfilled.

The first was "additional measures on Greece's part," in particular regarding fiscal policies, along with a "very concrete, tangible and intelligible plan" to privatise state-owned assets.

Thirdly, "it is important that the private sector ... assumes its responsibility," the finance ministry spokesman stressed, though he added: "Under what form, I cannot say yet."

On Tuesday, the Wall Street Journal reported that German authorities might be willing to forego their insistance that private investors be required to take part in a new programme to tackle the debt crisis.

That raised expectations on financial markets that some sort of agreement could be near at hand.

Kotthaus also suggested that the International Monetary Fund (IMF) would be expected to take part in a second Greek rescue, after already contributing to the first.

"It's a common programme," he said, "and I am working on the principle that it will be pursued in a common manner."

That held as well for "the next round of loan payments" under the initial programme, a 12-billion-euro tranche that Greece has said it needs desperately.

Both the European Union and IMF have warned that Greece has not met all of the rescue plan's conditions however, and the next payment is thus not a done deal.

Experts from the ECB, the IMF and the European Commission are currently in talks with Greek officials and are to issue an assessment of progress in the crisis in the coming weeks.

A report by the so-called troika was expected "by Friday night at the earliest," Kotthaus said.

On the other hand, its conclusions might be made public over the weekend or in a couple of weeks, he noted.

ECB leaders warn that Greek banks which own much of the country's debt could go under if they are forced to take losses now and that a ripple effect might swamp banks in eurozone countries like Ireland and Portugal, opening a horrid new chapter in the ongoing crisis.

On Wednesday, European junior finance ministers and treasury officials were to meet in Vienna to go over the situation in Greece.

Several sources have raised the possibility of convincing private investors to renew loans to Greece voluntarily, an idea that was implemented by the European Bank for Reconstruction and Development in January 2009.

Set up then to provide a framework for helping emerging economies in eastern Europe while the EU and IMF injected rescue funds into the region, the plan is known as the Vienna Initiative.

ING strategist Padhraic Garvey noted that for the idea to work in Greece, Athens would have to have as much success in running primary surpluses as Belgium, a western European country, did in similar circumstances from 2000 to 2008.

This is where financial markets have "serious doubts," Garvey said, and why investors ultimately expect Greece to pay back less than it owes.

© 2011 AFP

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