Euro Zone Weighs New Plan on Greek Bailout Collateral

The Wall Street Journal

By MATTHEW DALTON, RIVA FROYMOVICH and BERND RADOWITZ

BRUSSELS—Euro-zone governments are discussing a plan to have noncash Greek government assets, including real estate, offered as collateral for a new round of rescue lending to Greece, backing away from a bilateral agreement reached last week between Greece and Finland, officials said Tuesday.

The discussions come as opposition is mounting among the governments to the Finnish-Greek deal—which would see Greece pay Finland hundreds of millions of euros in cash as collateral against the loans. Crucially, German Chancellor Angela Merkel has rejected the deal, said a German lawmaker.

"It can't be that one country gets extra collateral," Ms. Merkel told parliament members of her ruling Christian Democrats, or CDU, in a meeting on European policy, the lawmaker said.

Other governments are now seeking similar deals, saying the arrangement could undermine Greece's ability to repay them.

The International Monetary Fund also opposes the agreement, because it could threaten the IMF's customary "preferred creditor" status that ensures the fund is always first to be repaid, officials say.

Earlier discussions had focused on finding liquid Greek assets—cash and possibly gold—that could be used as collateral. But now governments are considering whether illiquid assets such as Greek companies or even real estate could be used, the officials say.

One obstacle to such a plan is that much of what Greece owns is already earmarked to be sold for privatization proceeds; the nation's budget projections are grounded in having that revenue.

Countries' growing reluctance to expose their taxpayers to the risks of lending to Greece comes just as Germany and France are trying to cajole other euro members into greater economic cooperation. Last week, Ms. Merkel and French President Nicolas Sarkozy proposed tighter policy coordination between euro-zone states, in a quest to reassure markets about the cohesion and survival of the currency bloc.

Opposition to the Finnish-Greek deal has centered partly on the idea that Finland would be given cash-based collateral. Under the agreement, Greece would deposit about €500 million in an escrow account with the Finnish government, as a precondition for Finland releasing funds from the euro-zone's bailout fund. But the commission and member states have said this deal must be sanctioned by all euro-zone members.

The IMF "probably won't approve a cash arrangement, which makes use in the end of [bailout fund] money to give collateral to Finland," said one person familiar with the situation.

There are also obstacles to getting noncash collateral, officials said. Greece's complicated property laws make it difficult to establish what real estate is owned by the government.

The idea of using real estate could be sensitive in Greece. The government has strongly opposed any deals that would involve pledging Greek land or real estate as collateral, viewing the step as a threat to the country's territorial sovereignty.

A Greek government official said it was too early to comment on the euro working group discussions which are continuing.

Finnish Prime Minister Jyrki Katainen on Tuesday told Finland's public broadcaster YLE that the country's current bailout collateral agreement with Greece could be changed.

"For [Finland] it is important that we get the collateral," Mr. Katainen said. "And it is also important that this measure does not harm other countries. All this is now being discussed"

Finland's policy is in part a result of April's general election, which saw support for the bailout-opposing True Finns Party soar to 19% from 4.1% in 2007. The True Finns finished third and the election led to a new government coalition made up of six political parties.

Some euro-zone member states, including Austria and the Netherlands, openly criticized the Finnish-Greek deal.

Austria's Finance Minister Maria Fekter Tuesday said she couldn't accept the deal because it privileged one country over another. She warned that if every country were to ask for collateral, the Greek aid package agreed in July would collapse.

"It's not a viable option when Finland makes a deal with Greece to receive 20% collateral and all the other euro countries should pay," she said.

Austria had put forward an alternative plan whereby euro-zone countries would get collateral from Athens depending in part on the amount that those countries' banks contributed to the aid package.

A European Union spokesman said Tuesday that he is not aware of any other formal requests for Greek collateral arrangements besides Finland.

Moody's Investors Service Monday also criticized the bilateral agreement as "credit negative" for all bailout countries, which include Ireland and Portugal as well as Greece.

"The pursuit of such agreements could delay the next tranche of financial support for Greece and so precipitate a payment default," Moody's Senior Vice President Kristin Lindow noted.

In its statement, Moody's said that while Finland is supposed to contribute just about 2% of Greece's total bailout package, other countries are giving a larger share.

"A proliferation of collateral agreements would limit the availability of funds for future programs, as well as the value of the package that the bailout recipients actually receive," said Moody's. "Therefore, the agreement between Greece and Finland, which is small by itself, assumes much greater significance."

—Arild Moen in Helsinki, Alkman Granitsas in Athens, Nicole Lundeen in Vienna, and Marcus Walker contributed to this article