Greek Bond Swap May Be Extended

The Wall Street Journal

By COSTAS PARIS And ALKMAN GRANITSAS

LONDON—Greece's ambitious reform program suffered a double setback Wednesday after it emerged that talks with the country's creditors on a bond swap plan have stumbled and fresh data showed a sharp increase in the budget deficit.

Citing poor private sector participation, officials said that a plan to swap Greek government debt maturing by 2020 into new, longer-dated securities, might be extended to include bonds falling due in 2022 or even 2024.

This could be a further blow to European banks and insurers, which have been hit by their exposure to Greek sovereign debt following an agreed bailout package last month. Second-quarter earnings show an effective 21% loss on the net value of Greek bond holdings across Europe's banking sector due to impairments on their Greek holdings.

It also shows the difficulties faced by the euro zone in getting the private sector to significantly contribute in easing Greece's massive debt burden.

Speaking in a radio interview, Greek Finance Minister Evangelos Venizelos confirmed that Greece was struggling to "identify bonds worth €150 billion maturing by 2020—or a bit later than 2020," in order to realize its goals.

Separately, a senior euro-zone official said that the amount pledged by bankers under the deal has so far totaled "around €65 billion, which is below expectations." He added that a final agreement on the deal is now expected in September—instead of August as originally hoped for.

"The plan originally called for exchanging paper maturing until 2020," the euro-zone official said. "But the participation by the private sector is poor so far, so it could be stretched with bonds maturing in 2022 or even 2024."

French banks, which are heavily exposed to Greek government debt, plunged Wednesday on the news, with investors further spooked by concerns that France's triple-A credit rating might be at risk. French banks Societe Generale SA, BNP Paribas SA and Credit Agricole SA were sharply lower, dragging down the broader Paris bourse.

"If the maturity of Greek government bonds is extended to 2024, this could mean further depreciation of the assets of French banks that are exposed to Greek debt," said a trader, who spoke on condition of anonymity.

In July, European Union leaders agreed to a new €109 billion assistance program for Greece to cover its financing needs for the next several years. Central to the Greek plan is a distressed-debt exchange whereby the country's private-sector creditors agree to accept new bonds worth less than their original holdings.

The plan calls for swapping some €135 billion in Greek government bonds maturing between now and 2020 into new 15- and 30-year debt and, if realized, would slice €13.5 billion off of Greece's total stock of €350 billion in public debt.

As those talks stumbled, new finance ministry data showed Greece's state budget deficit in the seven months to July 2011 widening 24.6% from a year earlier as revenue collections continued to lag.

In a statement, the Finance Ministry said that the cumulative state budget deficit rose to €15.51 billion in first seven months of the year—compared with €12.45 billion a year earlier, while net budget revenues fell 6.4% budget expenditures jumped 7.1%.

"The budget figures are a big disappointment, they are completely off track and suggest that Greece's tax collection system has all but collapsed," said Yannis Stournaras, director of the Foundation for Economic and Industrial Research. "And the extension of the bond swap program will mean a bigger impairment for the banks and that they will be forced to raise more capital."