Merkel signals giving ground on Greek debt

17th June 2011, Comments 0 comments

German Chancellor Angela Merkel appeared on Friday to give ground on her demands for private involvement in a new Greek rescue following talks in Berlin with French President Nicolas Sarkozy.

While insisting that private holders of Greek government bonds bear some of the cost of a new rescue, Merkel said she now backed a new package for Athens along the lines of the so-called Vienna Initiative.

That 2009 deal to help Romania involved private banks voluntarily agreeing to roll over debts, in practice meaning lenders buy new bonds to replace those that mature.

"What we are talking about is the involvement of private investors on a voluntary basis, and the Vienna Initiative, as it is known, is a good foundation and I believe we can achieve something on this basis," Merkel said.

A Vienna-style "rollover" could reduce financing pressure on Greece for several years and is backed by the European Central Bank (ECB) and France, since it avoids the risk of rating agencies declaring Athens in default.

Merkel had been pressing for private investors to contribute up to a third of the second rescue package by accepting later repayment on their Greek bonds. Critics said this was akin to an obligatory involvement of private investors.

A default would force creditors to have to make debt provisions, reducing their profits, and trigger payment of default insurance known as credit default swaps that could badly destabilise markets.

Belgian Finance Minister Didier Reynders warned on Friday that a Greek default could be compared to the 2008 collapse of US bank Lehman Brothers, the event which triggered the global financial crisis, the worst since the 1930s.

"It seems that Germany is converging towards the European Central Bank's view," research director Kathleen Brooks said.

Both Merkel and Sarkozy said time was short.

"We need a solution as soon as possible so that we have clarity ... We have been talking about this for the whole of May and June, discussing the same issues again and again without resolving them," Merkel said.

"Germany and France are determined at the upcoming EU summit (next week) ... to say that we want a quick solution," Merkel told reporters ahead of a working lunch with the French president.

"There is no time to lose," Sarkozy said.

They also stressed that the rescue package be fully in accordance to the wishes of the ECB,

"This must be worked out together with the ECB so that there are no contradictions with the ECB," Merkel said.

But both leaders steered clear of giving details of what exactly the new package, estimated to be almost as big as last year's 110-billion-euro ($155.8-billion) bailout, will look like.

"There will be meetings all next week. The sooner the technical details are worked out the better," Sarkozy said.

"The aim of today's meeting was to set down the basic principles as precisely as possibly. Once these principles are worked out then the modalities for the package can follow very quickly."

Both leaders also called for a full report on Greece's finances by the "troika" of Greece's international creditors -- the European Union, the International Monetary Fund and the ECB -- to be presented as soon as possible.

Europe on Thursday sought to buy time, with the EU's economic affairs commissioner Olli Rehn saying Greece could receive a 12-billion-euro fifth tranche of loans under last year's first bailout.

He stressed that commitments as to the scale and scope of the second Greek rescue package -- tipped to be almost as big as the 110-billion-euro first one -- could wait until a July 11 meeting to be thrashed out.

An EU diplomatic source told AFP that the finer details could even wait until September, a position supported by Berlin, according to German media reports on Friday.

Rehn said the new phased approach "will avoid the default scenario" but warned that responsibility also fell on Greece.

Greece, though, is in political turmoil, with Prime Minister George Papandreou on Friday axing his finance minister Friday in a reshuffle a day after a party revolt by disgruntled backbenchers and angry protests in Athens.

© 2011 AFP

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