By Ingrid Melander and Andrei Khalip
ATHENS/LISBON (Reuters) - A European Central Bank policymaker said a voluntary deal for investors to keep renewing their Greek debt holdings might be acceptable, raising hopes on Wednesday for an aid agreement to prevent a default by Greece.
But Moody’s Investors Service slashed Greece’s credit rating by three notches to deep into junk territory, citing a growing risk that Athens would fail to stabilize its debt position without a restructuring that could mean losses for private investors.
A poor debt auction in Portugal and stalled Spanish wage talks highlighted market worries that the Greek crisis could broaden and deepen further.
ECB Executive Board member Juergen Stark was quoted as saying the central bank might accept a rollover of Greek debt by private investors, in which they would voluntarily agree to maintain their exposure to Greece through purchases of new bonds when their existing bond holdings matured.
“If this possibility is not perceived as a default or a partial sovereign default, then it could be a way of involving the private sector in financing Greece,” Stark said in an extract of an interview with Italy’s Il Sole 24 Ore.
ECB officials have for months been opposing any steps involving private creditors that might be seen as a default. So the ECB’s willingness to consider a rollover suggested Greece and creditors were making progress toward a new financing deal.
“Everyone seems to be converging slowly but surely toward a consensus which is likely to involve a mix of additional aid, more austerity and some private sector involvement,” said Gilles Moec, an economist at Deutsche Bank.
Sources close to talks between Athens and inspectors from the European Commission, the ECB and the International Monetary Fund said they expected the latest review of Greece’s fiscal reforms to be completed by Friday.
One Greek official involved in the discussions expressed optimism that this “troika” of institutions would release a 12 billion euro ($17 billion) loan tranche that Greece needs to cover its short-term funding needs.
“There will be a way for the disbursement of the fifth installment to be approved,” the official told Reuters, requesting anonymity. “The negotiations with the troika will be concluded today or tomorrow, the latest by Friday.”
Moody’s, however, said there was a high chance of further downgrades as it cut Greece to Caa1, a full seven notches into junk territory. This took the Moody’s rating three notches below Fitch’s B-plus and two notches below Standard & Poor’s B rating.
Greece is now rated by Moody’s at the same level where Argentina was in July 2001, about five months before that country announced it would default on its debt.
“At Caa1, historically, we’ve seen around 50 percent of sovereigns, corporates and financial institutions defaulting,” Moody’s analyst Sarah Carlson told Reuters in a phone interview.
Meanwhile, Portugal’s short-term borrowing costs spiked higher in a bill auction Wednesday and data showed manufacturing weakness across the periphery of the 17-nation euro zone, as the debt crisis that erupted in late 2009 continued to take its toll.
Portugal, which agreed to a 78 billion euro EU/IMF bailout last month and received its first tranche Wednesday, sold 850 million euros in four-month T-bills at an average yield of 4.967 percent, more than 0.3 percentage point above what it paid for three-month paper less than a month ago.
A reform of rules governing wage agreements would be one way to reassure markets that it is serious about boosting productivity levels which are among the lowest in the euro zone. The government has warned it will push through the reforms unilaterally by June 10 if no deal is possible by then.
Ireland, the other country alongside Greece and Portugal to receive an international bailout, received some support overnight when Standard & Poor’s said it believed the country had a good chance of returning to the capital markets next year to raise long-term funding.
But in Greece, a senior official at the private sector union GSEE said its workers would stage a 24-hour general strike on June 15 to protest against new austerity measures and planned privatizations.
Greece, which signed up to a 110 billion euro bailout in May last year, is now discussing a second rescue deal that could total some 65 billion euros to tide it over through end-2013.
As the Moody’s announcement underlined, even a second rescue would be unlikely to assuage concerns that Athens will eventually be forced into a coercive restructuring of its debt, which stood at nearly 330 billion euros — or close to 150 percent of GDP — at the end of last year.
A harsh restructuring that would force losses on private creditors has been ruled out for now, but Germany and allies such as Finland and the Netherlands want some sort of symbolic participation by the private sector in a second rescue.
So investors who hold Greek bonds due to mature in 2012 and 2013 may be encouraged to roll over that debt under a scheme similar to the “Vienna Initiative” used in early 2009 to safeguard banking systems in central and eastern Europe.
It is unclear what incentives governments could offer to convince investors to buy new Greek bonds, but in similar cases in the past, they have been promised higher interest payments, preferred creditor status or collateral as inducements.
EU officials are examining how Greek state assets marked for privatization could be used as security for Greek government bonds to be sold to banks, EU sources said.
In addition to the private sector role, a new package for Greece could involve a mixture of collateralized loans from the EU and IMF, as well as new Greek measures to raise revenues.
Athens may also be pressured into accepting unprecedented intrusive external supervision of its privatization program, which has yet to sell anything.
While confirmation of the latest aid tranche could come soon, haggling over the shape of the second bailout package is expected to continue over coming weeks, culminating in a summit of EU leaders in Brussels on June 24.
That summit is expected to be preceded by two separate meetings of euro zone finance ministers. The results of European bank stress tests, another key hurdle for the bloc, are now expected to be published in early July, the European Banking Authority said Wednesday.
Additional reporting by Brian Rohan in Berlin, Elisabeth O'Leary and Paul Day in Madrid, and Walter Brandimarte in New York; Writing by Noah Barkin and Andrew Torchia