German Move Roils Talks on Greece

Revived Proposal for Bond Swaps Raises Question on Plans for Encouraging Private-Sector Creditors to Help in Bailout

By STEPHEN FIDLER in Brussels, SEBASTIAN MOFFETT in Paris and BRIAN BLACKSTONE in Frankfurt

European governments' plan for private-sector creditors to help Greece's next bailout without triggering a default were thrown into doubt Wednesday, as senior German officials resurrected a once-rejected proposal that would cost investors more.

The German proposal—calling for investors to be encouraged to swap Greek government bonds for new bonds—had been ditched a month ago after strong opposition from the European Central Bank and governments including France, because it would lead to Greece being called in default by rating agencies.

The call from Berlin has reopened a debate over whether the 17 countries that use the euro should accept one of their number being labeled a defaulter even for a short period. It suggests Germany still thinks that's a price worth paying for a larger contribution by investors. That in turn would reduce the size of the new official bailout governments expect to provide for Greece to help tide it through 2014.

Until Wednesday, investors had been homing in on a proposal by French banks aimed at encouraging bondholders to roll over a proportion of debt as it matures over the next three years. But in recent days, the French rollover proposal has encountered obstacles.

Rating agency Standard & Poor's said on Monday it would view even that as a default. It also was becoming clear that the sums rolled over would fall far short of the €30 billion ($43.29 billion) target of euro-zone governments.

With other proposals emerging, and the question of whether to contemplate a default back in the mix, the negotiations are likely to drag on until September.

The default call on Monday by S&P, and Tuesday's decision by Moody's Investors Service to downgrade Portuguese debt deep into junk territory, brought a chorus of criticism of the rating agencies from European politicians. José Manuel Barroso, president of the European Commission, said the Moody's move had added to the speculation over Portugal.

"I deeply regret the decision of one rating agency to downgrade the Portuguese sovereign debt. And I regret it both in terms of its timing and its magnitude," he said.

As bankers and investors met Wednesday in Paris to discuss a private-sector contribution for Greece, senior German officials pitched in with an idea that had previously been discarded: Encourage investors to swap their holdings of Greek government bonds for new bonds, with longer maturities or lower costs.

German Finance Minister Wolfgang Schäuble said "there are many reasons for an alternative" to the French proposal.

His deputy, Jörg Asmussen, had earlier described the French bank plan as a good basis for discussion. But he told Reuters Insider TV that because the French proposal would be counted as a default, "we can also put other options, like a bond exchange, on the table."

He said the discussions over private-sector involvement, which some governments had hoped could be largely wrapped up next week, could last over the summer break.

Some proposals for a broad-based bond swap or a buyback of bonds, as some investors have also suggested, could start to reduce Greece's debt burden. But they wouldn't necessarily help significantly reduce the size of the bailout. The new bailout from other euro-zone countries and the International Monetary Fund, which follows a €110 billion rescue package last year, could approach a further €90 billion.

Germany's reopening of the bond-swap debate revives a dispute—thought to have been settled—between Berlin and the European Central Bank over the private sector's role in any additional Greek rescue package.

It suggests Germany is ready to accept that significant private-sector participation in a new bailout will result in Greece being categorized in "selective default" by rating agencies, which means some investors are judged as worse off as a result of the transaction. The ECB has strongly opposed a selective default.

Charles Dallara, managing director of the Institute of International Finance and chairman of Wednesday's meeting in Paris, said he didn't think the impact of a default would be as dire as predicted, provided it was selective and temporary. "I don't think that a temporary period of selective default, as it has been narrowly framed for sovereigns in the past, is necessarily the worst thing that could happen here," he told Bloomberg TV.

S&P's selective default ratings in the past have lasted between one day and six months.

Wednesday's investor gathering, at the Paris headquarters of BNP Paribas SA, was depicted as one of a number of technical meetings on the subject.

BNP Paribas Chairman Michel Pëbereau, who didn't attend the meeting, said: "Diverse solutions have been put on the table. It will be up to public authorities at the end of the day to know which solution will avoid default while satisfying them on their principles."

The IIF, which groups more than 400 financial institutions world-wide, said in a statement Friday that the technical meetings are aimed at coming up with a formula to help Greece's cash flow in the short term and then move toward a more sustainable debt situation. It said it would be important to consider possible debt buy-back proposals.

Some of the options already have triggered fights among European leaders. A month ago, when Mr. Schäuble first pushed a proposal to induce investors to swap Greek government bonds maturing in 2012 to 2014 for new bonds that would mature seven years later, ECB President Jean-Claude Trichet was firm in his rejection of any plan that rating agencies would deem a default, as would likely have been the case for the German proposal.

"No credit events, no selective default," Mr. Trichet said on June 9. "It would be an enormous mistake to embark on a decision that triggered a credit event," he said. A credit event is an occurrence that triggers payouts in the markets for credit default swaps, a type of insurance against default.

Some financial analysts have dismissed as window-dressing the plans for private-sector participation proposed so far by euro-zone governments. Sony Kapoor, managing director of Re-Define, a financial think tank, said: "The appearance of private-sector involvement is far more important to EU leaders than the actual fact of it. Any deal is likely to be mainly cosmetic with little if any benefits to Greece and EU taxpayers."

—Bernd Radowitz in Berlin contributed to this article