UPDATE: IIF Airs Greece Selective Default After Paris Bank Meeting
(Recasts and updates throughout)
By Sebastian Moffett and Costas Paris JULY 6, 2011, 2:38 P.M. ET
PARIS (Dow Jones)--The head of the Institute of International Finance said Wednesday that a selective default by Greece need not derail the country's efforts to emerge from its debt crisis, as bankers discussed a number of options for a rescue deal.
Private-sector banks are trying to figure out a way to participate in a deal to repackage Greece's debts so that European taxpayers don't have to supply all the funds -- but they want to do so in a way that avoids Greece being declared in default.
Charles Dallara, the managing director of the Institute of International Finance, told Bloomberg TV after a meeting of bankers in Paris that such a prospect might not be as dire as widely thought, if the default was selective and temporary.
"It may well be that some rating agencies reach judgments that involve a selective default," he said. "I don't think that a temporary period of selective default, as it has been narrowly framed for sovereigns in the past, is necessarily the worst thing that could happen here."
A default is feared because it might lead to contagion to other euro-zone countries struggling with debt -- fears that increased after Moody's Investor Service downgraded Portugal's debt to junk status.
A default might also affect the ability of Greek banks to post collateral with the European Central Bank. Standard and Poor's said Monday that a French plan to rollover part of Greece's debt would leave bondholders worse off.
An ECB spokesman declined to comment.
So far, the main proposal to involve the private sector in an aid package for Greece is a French plan for holders of bonds maturing between now and 2014 to agree to reinvest half the proceeds in 30-year Greek bonds.
Greece, however, thinks the French plan is too tough, and Wednesday's Paris talks discussed a revised proposal, said a senior euro-zone government official who was involved. The original French plan called for a 5.5% coupon for new 30-year Greek bonds bought by investors, which could be increased by up to an additional 2.5% depending on Greek economic growth. The new proposal calls for a floating-coupon based on the Euribor three-month rate, which was 1.57% on Wednesday, plus a premium of 1.7% or 1.8%.
"If it was to go into force today, the coupon would be around 3.3%," the official said. "There were serious reservations on parts of the French plan by Greece, and there are new proposals on both the interest rate and the proportion of debt that can be rolled over."
BNP Paribas Chairman Michel Pebereau said that an agreement could only come with the involvement of public authorities, including the European Commission, the International Monetary Fund and the European Central Bank -- the so-called troika.
"After this meeting there will certainly be a number of technical solutions on the table, but an agreement can only come with the Troika, the Greek government and all the bondholders concerned," Pebereau told French radio station BFM.
He told reporters that he wasn't directly involved in the discussions, which were held at his bank's headquarters in Rue d'Antin, between the Opera de Paris and the Jardin des Tuileries. "I hope we'll find a solution that satisfies those who don't want a default and at the same time the effort from the private sector to accompany the action of public powers."
The talks in the Rue d'Antin were one of a series of technical meetings chaired by the IIF. They are aimed at providing Greece with cash flow in the short term, and then moving it toward a more sustainable debt situation, the IIF said in a statement last Friday. It said private-sector involvement in a Greece plan would complement that from governments and would be based on a small number of options, including a roll-over or extension of maturities and the re-investment of creditor claims into long-dated instruments with principal collateralization. The IIF also said it would be important to consider possible debt buyback proposals.
-By Sebastian Moffett, of The Wall Street Journal; +33 1 40 17 18 07, sebastian.moffett@dowjones.com -By Costas Paris, Dow Jones Newswires; costas.paris@dowjones.com
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