Factbox: German proposals for new EU rescue mechanism

Thu Nov 25, 2010 5:58am EST

(Reuters) - Germany wants private investors to contribute to future bailouts under a new euro zone crisis mechanism to take effect from mid-2013, when the current temporary system is scheduled to expire.

Berlin says that only by including the private sector can taxpayers be placated and the risk of legal challenges to bailouts be averted.

The German government is still working out details for the proposal it wants to serve as a basis for discussion by EU leaders in mid-December on a permanent crisis mechanism.

Following are the proposals as they stand according to the latest government papers obtained by Reuters:

* Private investors should face "haircuts" -- write-downs in an asset's value as collateral -- or other debt payment restructuring measures under the new crisis mechanism.

"The private sector has precedence in contributing to the procedure," read a government paper, dated November 11.

In order to include the private sector -- banks and financial investors -- in the crisis mechanism, newly issued euro zone bonds would include collective action clauses (CACs), the paper said.

* The CACs could allow for a country to restructure its debt repayments should it be unable to meet them, either by extending the maturity of bonds, by reducing interest payments or by a write-down. The CACs operate by enabling a majority of creditors to dictate the terms of the restructuring, even if the rest are opposed.

* EU governments already have such clauses in debt instruments issued abroad.

* Euro zone sovereign bonds should, if possible, include private sector liability clauses from 2011 to ensure a smooth transition to a new rescue mechanism from 2013. The CACs could become effective with the new mechanism, sources say.

* Any country receiving aid would only be granted loans at "penalty rates," the document showed.

* The terms would also impose a raft of tough reforms on the country in question and could involve the possibility of unspecified sanctions.

(Reporting by Sarah Marsh and Gernot Heller; editing by Ron Askew)

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