The Wall Street Journal
BERLIN—European leaders will convene on Thursday for an emergency summit on Greece, in a quest to resolve the festering debt crisis threatening ever more euro-zone countries.
The summit will aim to approve a plan for private-sector involvement in financing the Greece government, senior European officials said.
Such an agreement would resolve the last major stumbling block to a fresh bailout package for Athens, needed to prevent the country from defaulting on its roughly $500 billion of debt.
Euro-zone governments and the European Central Bank have been arguing for three months about whether banks and other bondholders should be made to share the burden of funding Greece, with the ECB and some national capitals arguing that imposing costs on private investors could wreck the market's confidence in many other euro countries.
But Germany, Europe's biggest economy, has insisted there can be no new money for Greece without private-sector involvement, and is now close to a deal that would impose Berlin's will on the euro zone. The ECB appears to have lost the support of national governments in recent days, as euro members have swung behind Germany's desire for bondholder participation.
"The question is how, not whether" there will be private-sector involvement, said a senior European official.
European Council President Herman Van Rompuy announced the special summit on Friday, saying the heads of the 17 countries that use the euro will discuss "future financing" of Greece. Senior officials from euro-zone countries are rushing to complete technical negotiations in coming days so leaders can approve a blueprint at the summit.
The blueprint will aim to reduce Greece's crushing debt burden, which most euro-zone policy makers now privately accept is unsustainable, people familiar with the matter said.
In recent days, Germany had been publicly skeptical about the point of holding an early summit, arguing that more time was needed to prepare an agreement. But Berlin has now accepted that urgent action is needed, because continuing uncertainty over Greece's fate has led to a widening investor panic in the past week.
A sharp selloff of Italian and Spanish bonds in recent days fueled fear that the debt crisis might escalate beyond Europe's control, and led to pressure from Southern European countries on Germany to take decisive action.
The plan for private-sector involvement may offer banks a choice between different forms of participation in the Greek bailout, people familiar with the matter said.
One option that has gained support lately is for European authorities to finance a buyback of Greek bonds at discounted prices, these people said. Another is to offer banks an exchange of existing Greek bonds for new, long-term Greek debt obligations. In either case, bondholders would be expected to take a writedown on their Greek debt holdings if they haven't done so already.
It isn't clear how far such plans would go toward reducing Greece's overall debt, since their impact depends on the small print and on how financial markets respond, analysts said.
European leaders may only sign off on an outline of a deal, leaving officials to finalize the details in coming weeks, including in continuing talks with European banks.
Although officials say the plan will be presented as voluntary, governments expect that credit-rating agencies will declare that Greece is in "selective default," meaning that part of its debt isn't being serviced fully. But governments believe that outcome is unavoidable if there is to be any burden-sharing with investors at all.
The ECB remains strongly opposed to government's plans for private-sector involvement. ECB officials fear a declaration of Greek default, even of a narrow kind, could cause a wider conflagration in financial markets.
But the ECB has been marginalized in the negotiations over the past week, euro-zone officials say. The ECB declined to comment.
As part of the wider bailout package, euro-zone governments are expected to loan Greece extra money to recapitalize its banking sector, people familiar with the talks say.
Greek banks are heavily exposed to their governments' bonds and have been using them as collateral to borrow funds from the ECB. In May, ECB lending to Greek banks totaled about €100 billion (about $141 billion). The ECB has said it won't accept collateral that is in selective default. If it follows through on that pledge, the move would starve Greece's banks of liquidity unless they can find another source of funding —an issue that Thursday's summit will need to address.
The rescue package for Greece aims to cover a financing gap in Greece's public finances of €100 billion in coming years that wasn't covered by last year's initial, €110 billion bailout of the country by the euro zone and the International Monetary Fund.
The full package may take until September to complete. The expanded bailout of Greece requires Athens to implement drastic austerity measures, on top of existing spending cuts and tax increases, and to raise €50 billion by privatizing state assets.
—Charles Forelle contributed to this article
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