Greek Rescue Snarled by Sales

By STEPHEN FIDLER And MATTHEW KARNITSCHNIG

Europe's hopes for a significant contribution by private bondholders to a new bailout for Greece are fading, as it becomes clear that banks have sold off a substantial proportion of their Greek government-bond holdings despite pledges by some of the institutions not to do so.

Greece has about €64 billion ($93 billion) of benchmark bonds coming due in the next three years, among other liabilities, and euro-zone leaders had hoped that private lenders would voluntarily take on longer maturities in order to improve the country's battered finances

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Euro-zone officials have described €30 billion as their target for private-sector participation in the new bailout. Governments want holders of Greek bonds that mature before the end of 2014 to agree to reinvest some of the money as the bonds mature. But the €30 billion target appears increasingly unrealistic.

The problem is that the banks and insurers at the negotiating table no longer hold as much of the debt maturing through 2014 as they did a year ago. In May of last year, German banks and insurers made a nonbinding pledge to maintain about €8 billion in Greek debt and loans for three years. Yet the current Greek debt holdings of those institutions suggests they have sold some of their holdings anyway.

There isn't detailed information on how much Greek debt German and other European financial institutions may have jettisoned. Allianz SE, the German insurer, has said it holds €1.3 billion in Greek bonds, compared with €3.3 billion last year. The company has said it would be willing to roll over about €300 million under the current proposal.

In an interview with Der Spiegel, the German weekly, Chief Executive Officer Michael Diekmann said Allianz had fulfilled its commitment under last year's pledge not to sell into "a falling market." He also said that the insurer had agreed not to sell only for as long as it made "economic sense."

Analysts said banks were likely to have sold off short-term Greek debt because it trades at a smaller discount to face value than does longer-term debt. Meanwhile, hedge funds and other investors, who are likely to have bought up the paper, are less likely to be persuaded to engage in the debt rollovers being proposed by euro-zone governments.

A meeting of leading financial institutions in Paris on Wednesday, under the auspices of the Institute of International Finance, a Washington-based body representing more than 400 banks world-wide, will discuss, among other things, trying to increase private-sector participation. One senior European politician who has been involved in the talks said they were unlikely to lead to any meaningful burden-sharing by banks or other creditors, suggesting the exercise was window dressing for domestic consumption in Germany.

German banks, the second-largest holders after French banks, have provisionally agreed to roll over €3.2 billion. Private German banks hold around €10 billion in Greek government bonds, but about 55% of that amount isn't due to mature until after 2020.

The proposals on that table would only apply to debt that matures through the end of 2014. That includes some €2 billion in bonds held by Deutsche Bank AG, Commerzbank AG, Landesbank Baden-Wurttemberg, DZ Bank, HypoVereinsbank and insurers Munich Re and Allianz. The remaining €1.2 billion in Greek debt is held by "bad banks," German government vehicles set up during the global financial crisis to isolate troubled assets.

French banks, which have about $15 billion in Greek government debt, according to the Bank for International Settlements, haven't said how much they would be willing to roll over under the proposed plans.

The original proposal for private-sector participation in the bailout called on investors to reinvest 50% of their holdings into new 30-year bonds, invest a further 20% into high-quality zero-coupon bonds that would guarantee eventual repayment, and cash out 30% of their holdings. The new proposal would up the share reinvested to 70%, with a further 30% being invested in guarantees of repayment at maturity.

Other changes, say people briefed on the ideas, include switching the fixed interest rate on the new bonds to one that floats with changes in money-market rates. That would cut the interest rate Greece would pay in the short term for the new bonds, although it would increase the risk that in the future, interest payments would rise.

It wasn't clear, though, that any of the proposals being discussed would tempt more investors to participate. However, banks are also seeking to have a favorable accounting treatment of the rollovers so they don't have to write down the value of their Greek bond holdings.

This is also an important issue for Greek banks. If they are forced to take write-offs for participating in the rollovers, they are likely to need more capital, and this can only come ultimately from the new bailout funds from euro-zone governments and the International Monetary Fund. Greek bank participation in the Greek rollover would thus do little to reduce the size of the bailout.

While governments led by Germany have been pushing private-sector participation, they have also said they want to avoid Greece being called into default.

All of the major ratings companies, however, have signaled that they would likely treat the arrangement on the table as a default, a reality that has further complicated the negotiations.

—Sebastian Moffett contributed to this article.