The eurozone's options for Greece

20th July 2011, Comments 0 comments

The eurozone is scrambling to agree on a second bailout for Greece and prevent the debt crisis from taking down bigger nations such as Italy and France.

Here are the options on the table:


Germany wants private investors to swap Greek bonds in hand for new bonds with lenghtier maturities. France is suggesting a similar arrangement in which banks voluntarily buy new Greek bonds to replace those about to mature, a process called a "rollover." The problem: Credit ratings agencies warn that this would amount to a default. Germany is open to letting Greece face some sort of default, but France and the European Central Bank vehemently oppose this. The ECB says it would then be obliged to end lifeline finance for Greek banks.


The goal here is to reduce the Greek debt burden, which has mushroomed to 350 billion euros ($494 billion), amounting to 160 percent of gross domestic product. Under one option, eurozone nations would lend money to Greece through the bloc's crisis fund, the European Financial Stability Facility (EFSF), allowing Athens to buy back part of its debt on the markets at a lower price.

Another idea would be for the EFSF to directly buy depreciated Greek debt on the market and in exchange give investors fresh EFSF-issued bonds. This option could also be interpreted as a partial default. Germany also sees the risk of this being the beginning of an unacceptable pooling of debt in the eurozone.


France suggests that a special tax could be imposed on banks in the eurozone, whether they hold Greek debt or not. It is unclear if it would affect other holders of Greek debt, such as insurance companies. This idea would fulfill Germany's demands that the private sector share the burden in a second Greek bailout without triggering a default. But French and German banks oppose it.


The eurozone could offer new loans to Greece with longer maturities and lower interest rates than what was given in the first, 110-billion-euro rescue package last year. Another idea would give the EFSF the same power as the IMF quickly to provide funds to struggling nations without getting prior approve from EU governments.


A radical and risky option. Greece would unilaterally refuse to pay back part of its debt -- half of it, for example, a step Argentina took during its own debt crisis a decaded ago. Eurozone governments oppose this, fearing it would spark a devastating domino toppling other weak economies in the 17-nation single currency area. Financial markets see this as inevitable. In Germany, some economists advocate this option. In an editorial on Wednesday, the daily Frankfurter Allgemeine Zeitung said Greece would then have to be forced out of the eurozone.


This option, long advocated by Luxembourg Prime Minister Jean-Claude Juncker, has resurfaced despite Germany's disapproval. This would allow the eurozone to issue joint bonds in order to help weaker nations to continue borrowing money on the markets by sharing risks, another route to a pooling of debt. The yield would be an average of the interest rates paid by eurozone states. Germany enjoys the lowers interest rates in the euro area thanks to its sound financial state. One effect could be that the credit ratings of stronger countries might weaken to reflect that they were being diluted by the risk of weaker countries. Germany is reticent, saying that the underlying issue is that weak countries must control spending and raise competitveness.

© 2011 AFP

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