January 19, 2011 / 3:07 PM / 8 years ago

UPDATE 3-Germany studies possible Greek restructuring -sources

* Berlin officials probe impact on banks of default - source

* Germany examines change to bond coupon or haircut scenario

* Finance Ministry starts analysis, no conclusions reached

* Greece, Germany deny any intention to restructure

(Adds detail on movement in Greek credit default swaps)

By John O’Donnell

BRUSSELS, Jan 19 (Reuters) - Officials in Germany’s finance ministry are working on contingency plans to handle the fallout in case Greece defaults or needs to restructure its debt, sources with direct knowledge of the matter said.

One source close to the finance ministry said German civil servants were analysing how a Greek restructuring might work, as well as what this would mean for German banks and the stability of the euro zone. No conclusions have yet been reached.

“They have started to consider the unthinkable,” said the source. “They are looking at a contingency plan preparing for Greek restructuring.

“It is not something they want, but something they recognise,” he said. “They would be unprepared for the impact on their own bank balance sheets. They have started to see what the Greek constitution says.”

German newspaper Die Zeit, citing government sources, reported Berlin is considering a plan to allow Greece to buy back its own debt using euro zone crisis funds. [ID:nLDE70I0YD]

Some investors saw that report as a possible new step forward in Europe’s efforts to quell the debt crisis, and the idea of a shift of Greece’s debt out of private hands and onto EU governments buoyed markets, reducing the relative cost of borrowing for Italy, Spain and Portugal.

But Greece and Germany denied preparing for any restructuring of Greek debt.

“There is no discussion on the issue of restructuring,” Greek Deputy Finance Minister Philippos Sachinidis told Reuters.

A German finance ministry spokesman said in a statement: “Germany is not preparing a restructuring of Greek debt.”

Publicly, Germany remains opposed to any restructuring or partial non-payment of Greek debt, but some officials in Berlin are increasingly concerned that it may be inevitable.

The sources told Reuters that one of the outcomes being examined is that the maturity or life of Greek bonds would be extended, together with a cut in the coupon or interest rate — measures that would substantially reduce the value of the debt.

As an incentive to investors, EU countries could offer guarantees to bondholders to reassure them of the security of their Greek debt. Another scenario being examined is a straightforward cut to the face value of the bond.

“They are still thinking of a voluntary exchange,” said the source.


A second, German source linked to the country’s financial policymaking, said officials were weighing the possibility of a default on Greek debt.

“They are in the course of looking at scenarios — one is that they must restructure. And for Ireland too,” he said.

“It is a balancing act. It is economically necessary. It is not politically opportune to do it overtly. You cannot restructure Greek bonds and do nothing for Ireland. Officially, no one is speaking, but it is an ongoing issue.”

German banks have the second-highest exposure to Greek debt — almost 37 billion euros — and the highest to Ireland of more than 138 billion euros, but many banks have shifted many of these loans onto the so-called bank book, where writedowns would not be immediate. “Everyone knows that Greece has never been in a position to ... fulfil their obligations, whatever the interest rate,” said one senior German banker.

“The question is the right timing (of restructuring). The banks have had time to prepare well. That goes for Hypo Real Estate, WestLB or any other landesbank.”

Many in the markets expect that Greece’s debt, which is set to peak at 157 percent of its gross domestic product (GDP) in 2013, may be too high for the country to repay entirely.

The price of credit default swaps on Greek bonds, used to insure against the risk of default, puts the chances of Athens defaulting at 30 percent over the next two years.

“The market is pricing in a significant probability of a default or a restructuring and looking at the change in Greek spreads today — 2-years underperforming Germany and 30-years outperforming — implies near term uncertainty has increased,” said Credit Agricole rate strategist Peter Chatwell.

Despite street protests and strikes, the government in Athens is sticking to its austerity drive and insists there will be no restructuring of its debt, although Deputy Prime Minister Theodoros Pangalos has said this could help Greece.

For a graph on bank exposure to Greece and Ireland, follow: here (Additional reporting by Ingrid Melander in Athens, Adam Parry and Kirsten Donovan in London; Editing by Mike Peacock and Patrick Graham)

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