Stephen Fidler and David Gauthier-Villars From: The Wall Street Journal June 27, 2011 9:27AM
French bank Societe Generale's central headquarters. Picture: AFP Source: The Australian
FRENCH banks have proposed a plan to reinvest half the proceeds from maturing Greek government bonds ahead of a meeting of key players, in efforts to encourage private investors to contribute to a new bailout for Greece.
The French proposal, which will feature in the discussions at a meeting tonight in Rome, is aimed at organising an orderly participation of private creditors in a resolution of Greece's debt problems. It calls for half of the proceeds from maturing Greek bonds to be reinvested in 30-year Greek bonds. A further fifth of the proceeds would be invested in high-quality bonds as an insurance policy to guarantee repayment after 30 years.
The proposal, which emerged from a meeting on Friday of French banks, has echoes of the Brady Plan where US Treasury zero-coupon bonds were purchased to provide guarantees of repayment at maturity.
Germany and other official lenders to Greece have been insisting that if they are going to contribute more money to a new Greek bailout, they don't want large sums quickly going to pay bondholders. After weeks of wrangling, they decided that any such participation should be "voluntary".
Since that agreement, behind-the-scenes talks about how to achieve this have intensified, co-ordinated by the Institute of International Finance, a Washington-based group comprising more than 400 banks and financial institutions world-wide. Its managing director, Charles Dallara, will be at the meeting tonight. A spokesman for the IIF confirmed Mr Dallara would be present at the meeting.
Also expected to attend the meeting hosted by Intesa Sanpaolo in Rome are representatives from banks, insurance companies, officials from the Greek and other European governments, as well as the European Union and the European Central Bank.
French government officials said the plan drafted by French banks provided an "interesting solution" that was "worth exploring". European governments have said they want private creditors to roll over as much as 30 billion euros ($40.5bn) worth of Greek government bonds.
France has a particular interest in finding a solution for Greece because French banks are more exposed to Greek debt than those of any other country outside Greece. German banks hold more sovereign debt than the French, but two large French banks -- Societe Generale and Credit Agricole -- also have controlling stakes in Greek banks, meaning they are exposed via the loan books of these subsidiary banks.
A person expected to attend said the meeting would try to develop a framework for private-sector participation in the new Greek bailout, but that detailed proposals would take more time to emerge. The issue is fraught with legal and accounting complications for participating banks, depending on whether the bonds are held for trading or being held to maturity, and the likelihood that different national accounting rules could lead to diverging accounting treatments of the same decision.
Accountants and lawyers will also be represented at the meeting.
One group that won't attend the meeting is the rating firms. Yet most ways of getting a substantial private-sector contribution in the Greek bailout would trigger a default call by rating firms, raising questions about how the ECB would treat the Greek bonds that it holds as collateral against loans to euro-zone banks.
National shutdown comes as parliament debates austerity reforms to help crisis-hit government secure rescue loans.
Last Modified: 28 Jun 2011 05:46
Parliament is debating new austerity measures that will help Greece secure more rescue loans [Reuters]
A 48-hour general strike is under way in Greece as the country's parliament debates a new round of austerity reforms that will help the bankruptcy-threatened government secure rescue loans.
The strike, which began on Tuesday, is set to disrupt or halt most public services.
The strike has been called by unions angry at a new €28bn ($40bn) austerity programme that would slap taxes on minimum wage earners and other struggling Greeks, following months of other cuts that have seen unemployment surge to more than 16 per cent.
"These measures are a massacre for workers' rights. It will truly be hell for the working man," said Thanassis Pafilis, a lawmaker with the Greek Communist Party that will lead one of Tuesday's main rallies.
"The strike must bring everything to a standstill."
Protesters will be joined by doctors, ambulance drivers, journalists and even actors at a state-funded theatre.
Public administration offices and banks will close their doors, hospitals will have reduced staffing and Greek media will down tools for five hours on each of the two days.
Trams and buses will not run in Athens, but metro drivers joined other employees on the subway system who decided not to strike "so as to allow Athenians to join the planned protests in the capital."
Flights will be grounded on both days during stoppages by air traffic controllers between 8am and midday and between 6pm and 10pm (0500-0900 GMT and 1500-1900 GMT).
The strike by air traffic controllers has already caused travel disruption with airlines Olympic Air and Aegean cancelling dozens of mainly internal flights, and rescheduling a series of international departures.
The move comes a day after French banks reached an outline agreement to roll over holdings of maturing Greek bonds as part of a wider European plan to avoid sovereign default.
George Papandreou, the prime minister, begged the Greek parliament late on Monday to do its "patriotic duty" and vote to keep the country "on its feet".
The package and implementation law must be passed by parliament this week so the European Union and the International Monetary Fund release the next installment of Greece's €110bn ($156bn) bailout loan.
Without it, Greece faces the prospect next month of becoming the first eurozone country to default on its debts - a potentially disastrous event that could drag down European banks and affect other financially troubled European countries.
Papandreou said he hoped the terms of a second bailout would be better than the first, which was agreed last year.
"I call on Europe, for its part, to give Greece the time and the terms it needs to really pay off its debt, without strangling growth, and without strangling its citizens," he said.
Analysis: Default needed to lure long-term buyers back to Greece
A demonstrator holds the Greek flag in front of the parliament in Athens, June 15, 2011. Credit: Reuters/Pascal Rossignol
By Marius Zaharia LONDON | Tue Jul 5, 2011 1:24pm EDT
(Reuters) - Long-term investors standing aloof from the Greek debt crisis want holders of its government bonds to take a loss big enough to slash the country's debt to sustainable levels before they consider returning.
Greece is still expected to default at some point and for most investors who have dumped bonds over the past two years and who are crucial to put the ailing economy back on its feet, the longer that is delayed, the longer it will be before they consider looking at Greek assets again.
A likely second bailout -- currently under tortuous negotiation -- is seen only as a means to buy time for euro zone banks to provision for eventual losses and protect the bloc's larger economies from contamination, while the reforms attached to the package will be hard to implement in the face of deepening public resentment.
"We would buy if the economy manages to reform itself and if the banking sector is self-funded, but I don't think that's going to happen on a five-year view," said Russell Silberston, head of global interest rates at Investec Asset Management, who manages $31 billion worth of fixed income assets globally.
"Our view is they also need to default before that."
Greek Finance Minister Evangelos Venizelos told Reuters on Monday he intended to return to market funding in the middle of 2014.
Most investors don't think that will happen without a major restructuring to make Greece's debt mountain sustainable and remove it from the downward spiral of constant deficit-cutting which will wreck any chance of economic recovery.
"For Greece, starting over is the only solution," said Kommer van Trigt, a bond fund manager with Robeco Group, managing about 40 billion euros ($57 billion)
Silberston said the "first default" was near as France's proposal for a voluntary rollover of Greek debt seemed to be gathering momentum. But that would not solve Greece's solvency problem.
With debt expected to reach 1.6 times its 2011 economic output, economists say Greece would need a primary budget surplus of about 5 percent of gross domestic product, compared with last year's 5 percent primary deficit, simply to stabilize its debt at current levels.
On the assumption that Greece's debt-to-GDP ratio would peak at 166 percent, Evolution Securities calculations show a haircut of about 64 percent would be needed to bring the ratio back to the ceiling of 60 percent agreed in the EU'S Maastricht Treaty.
The Greek debt curve fully prices in a 50 percent haircut on average, according to UniCredit. But imposing losses on bondholders before gaining credibility may be in vain.
Investec's Silberston said besides a haircut, he would want to see several quarters of primary budget surpluses achieved in a sustainable way -- and not through privatization revenues -- before buying Greek debt.
"The big problem with a major haircut is that ... you would still need to have a very high premium for people to buy Greek debt after that date because if you look historically at haircuts, they tend not to be in isolation," said Jack Kelly, an investment director on global government bonds at Standard Life Investments, which manages assets worth 157 billion pounds ($250 billion).
CHEAP IS NOT ENOUGH
After an immediate Greek default was avoided with 12 billion euros of emergency loans and a fresh round of belt-tightening measures agreed in Athens, yields on some of its debt have fallen by more than 200 basis points.
But at over 27 percent for two-year paper and 16 percent for the 10-year they are still punishingly high. Only short-term investors were behind the rally, which was also exacerbated by thin volumes.
Kelly said Standard Life, which sold its last holdings of Greek debt in June 2010, would only buy it back if it reached investment grade again or as part of a EU common bond, something Germany has ruled out.
Although rated above junk, Portugal and Ireland, the other bailed out countries in the euro zone, are also considered a no-go by long-term debt investors because of the risk they will be dragged down with the Greek crisis.
But those countries have a chance to turn things around faster than Greece. The best placed is Ireland, whose exports are more competitive and its labor markets more flexible.
"The numbers are a bit better for Portugal and Ireland," said van Trigt at Robeco Group. "At this point we are not really differentiating between Greece, Ireland and Portugal. Going forward, a country like Ireland has a better starting position."
THE RIGHT PRICE
With the timing and magnitude of any Greek debt haircut hard to predict because politics plays a greater role than mathematics, it is hard to assess what price would draw investors back into Greece.
A common comparison is Uruguay's debt restructuring in 2003, when the price for its 2012 bond rose from about 40 to 60 cents in the dollar immediately after the event.
Greece's June 2020 bond trades at 55 cents in the euro.
"At prices of under 50, there will be value in eight- or nine-year (Greek) bonds at some stage," said Ciaran O'Hagan, strategist at Societe Generale. "But only when accounts are rendered sustainable, e.g. through restructuring."
That only holds good if Greece avoids a unilateral and disorderly default like Argentina's in 2002. It organized large debt swaps in 2005 and 2010 yet is still shut out of debt markets.
Market pricing before any haircut could offer opportunities to buy on the view that Greek bondholders were too pessimistic about the extent of such a move. But it would not help Greece, as those investors may bail out soon afterwards and their spending would be small.
"Those would only be incredibly hot money," said Robert Talbut, chief investment officer at Royal London Asset Management, which runs assets worth 40 billion pounds ($64 billion). He added he would not take that risk. ($1 = 0.626 British Pounds) ($1 = 0.705 Euros)
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