Euro ministers fail to clinch deal on Greek aid

BRUSSELS Tue Jun 14, 2011 7:32pm EDT

Finance ministers, German Wolfgang Schaeuble (L), Spanish Elena Salgado (C) and Greek George Papaconstantinou (R) attend an extraordinary euro zone finance ministers meeting at the EU Council in Brussels June 14, 2011, to discuss Greece's fiscal adjustment program. REUTERS/Thierry Roge

Finance ministers, German Wolfgang Schaeuble (L), Spanish Elena Salgado (C) and Greek George Papaconstantinou (R) attend an extraordinary euro zone finance ministers meeting at the EU Council in Brussels June 14, 2011, to discuss Greece's fiscal adjustment program.

Credit: Reuters/Thierry Roge

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BRUSSELS (Reuters) - Euro zone ministers failed on Tuesday to reach agreement on how private holders of Greek debt should share the costs of a new bailout, putting the onus on the leaders of Germany and France to forge a deal later this week.

Nervous markets pushed the bond yields of Greece, Ireland and Portugal to their highest levels since the introduction of the euro in 1999 amid uncertainty over a second rescue for Athens and the contribution governments are likely to demand from the private sector.

European paymaster Germany, backed by the Netherlands, wants the banks, pension funds and insurance firms that hold Greek debt to swap their bonds for new ones with maturities that are seven years longer.

This would buy Greece more time to chip away at its massive 330 billion euro ($477 billion) debt mountain and limit the amount of taxpayer-funded aid Athens would receive. But ratings agencies have warned they would view this as coercive and label it a default.

Fearful that Berlin's plan could unleash a new wave of contagion, the European Central Bank, European Commission and France are pushing for a softer solution in which bond owners would be encouraged, probably by incentives, to buy new Greek debt as their holdings matured.

"There has been no result," German Finance Minister Wolfgang Schaeuble told reporters after talks in Brussels ended late on Tuesday.

Schaeuble's counterpart from Luxembourg, Luc Frieden, said ministers had narrowed their differences and their goal remained to seal an agreement later this month.

"We have to be very careful that this is not considered to be a 'credit event', to be very careful that this does not lead to a rating downgrade. It's only under these strict limitations that we can move toward private sector involvement," he said.

Discussions within the so-called Eurogroup were due to continue on Sunday evening in Luxembourg, ministers said.

To avert financial disaster for Greece, the bloc must forge a compromise by a June 23-24 EU summit.

But investors will be closely watching a meeting in Berlin on Friday between Chancellor Angela Merkel and French President Nicolas Sarkozy, where the outlines of a final deal could be sketched out.

DEAUVILLE DEAL

Merkel and Sarkozy have forged compromises on several contentious issues since the bloc's debt crisis erupted in late 2009, notably a controversial deal sealed last year on the beach in Deauville, France which spelled out for the first time that investors would be asked to shoulder the costs of future euro zone bailouts from mid-2013.

Since then opposition to taxpayer-funded rescues has grown, especially in northern European countries like Germany, Finland and the Netherlands, forcing leaders to consider pursuing soft forms of debt restructuring even sooner, despite repeated warnings from the ECB.

"Somebody has to concede ground over the coming days or the region will experience a full-blown financial crisis," said David Mackie, an economist at J.P. Morgan.

"Given that the Germans and the French are on opposite sides in the restructuring debate, if the two leaders can reach a compromise then it will carry for the region as a whole."

In a sign of just how far worries about the euro zone have spread, China's central bank used its annual financial stability report to sound one of its starkest warnings yet about Europe's debt mire, saying rescue measures had failed to tackle the root causes of the crisis.

"There is a possibility that the sovereign debt crisis will spread and deteriorate," the report said.

The European Union and International Monetary Fund bailed out Athens to the tune of 110 billion euros ($160 billion) just over a year ago, and followed up with similar packages for Ireland and Portugal.

A new rescue is now being thrashed out for Greece as it continues to sink under a debt pile that totals roughly 150 percent of its annual output.

Officials in Brussels say the new deal would keep Greece funded through 2014 and total about 120 billion euros, comprising 60 billion euros in new EU/IMF aid and an equal amount from a combination of privatization receipts and private sector contributions.

VIENNA INITIATIVE

Mario Draghi, who is due to take over as president of the ECB later this year, reiterated at a European Parliament hearing that the central bank remained opposed to any private sector solutions that contained any element of compulsion.

But he signaled the ECB could accept a debt rollover based loosely on the "Vienna Initiative" in which foreign banks agreed, at the height of the global financial crisis in 2009, voluntarily to maintain their exposure to central and eastern Europe.

"There are basically two initiatives that are under discussion. One is the Vienna Initiative, which to me looks entirely voluntary," Draghi said. "Another one is a debt exchange, which I haven't understood whether it is voluntary or it could end up being involuntary."

Standard & Poor's downgraded Greece on Monday, making it the lowest-rated sovereign borrower in the world.

The Greek government is trying to push through new austerity measures worth some 6.5 billion euros for 2011 alone, almost double the belt-tightening already agreed for this year.

But Prime Minister George Papandreou suffered a blow on Tuesday when two ruling party lawmakers said they would vote against the measures.

Protesters have said they will cordon off parliament to prevent deputies from debating the plans on Wednesday and unions are vowing to bring the country to a standstill with a national strike.

(Additional reporting by Jan Strupczewski in Brussels and Michael Winfrey, Lefteris Papadimas, Harry Papachristou and George Georgiopoulos in Athens)

(Writing by Noah Barkin, editing by Tim Pearce)

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