NEW FRENCH PLAN / DER SPIEGEL ( A MUST READ )

06/29/2011 01:38 PM

New French Plan

German Banks Signal Willingness to Help Greece

A new plan by French banks could lead to a breakthrough in efforts to create a second bailout for debt-stricken Greece after German banks also signaled their willingness to participate. German Finance Minister Wolfgang Schäuble has reportedly scheduled meetings with the country's top bankers to discuss the scheme.

The German government has repeatedly insisted that private investors must take part in further financial aid for Greece, a requirement that has been met with some resistance. But now a potential solution to the conflict has emerged. A number of media reports say that German banks are prepared to take part in a new "soft" debt restructuring plan by Paris aimed at encouraging private sector participation.

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"The French proposal should form the basis for working out a German decision," an unnamed German Finance Ministry insider told news agency Reuters on Tuesday afternoon. Meanwhile Finance Minister Wolfgang Schäuble was expected to meet personally with leaders of the country's largest banks and insurers on Thursday to negotiate a plan.

According to the model proposed by French banks, which are among the most vulnerable to Greek debt, financial institutions would roll over some 50 percent of Greece's soon-to-mature bonds and invest in new bonds not set to mature for another 30 years. Some 20 percent would flow into a special fund secured by high-value securities.

The banks hope such a plan would encourage the private sector participation in a second Greek bailout, thought to be worth up to €120 billion, currently under negotiation. Though the plan would protect them from default losses should Greece become insolvent, daily Financial Times Deutschland reported late Tuesday that it remains unclear whether the German banks would accept the period of 30 years for the new bond issues. Alternatively a number of special purpose entities could be established for parallel security.

Awaiting Greece Austerity Vote

Germany's central bank, the Bundesbank, welcomed the negotiations with other banks in the country. But Joachim Nagel, head of the Bundesbank's markets department, told daily Süddeutsche Zeitung that participation of private investors should not "lead to a greater burden on the public budgets."

Furthermore any bank contributions must be voluntary. The hope is that ratings agencies will not see a soft restructuring as a Greek default, he told the paper.

According to earlier estimates, German banks and insurers hold Greek debt valued at between €10 billion and €18 billion ($14.3 billion and $25.9 billion). Should ratings agencies view the restructuring plan as a Greek default and further downgrade Greek debt, it could dramatically intensify the already dire debt crisis facing the country and the European common currency.

The second Greek bailout package, which experts hope will include such voluntary participation by private investors, is scheduled to be laid out on July 3 at a special meeting of European ministers.
Meanwhile the Greek parliament votes Wednesday afternoon on new austerity measures required by the European Union for the country to receive the next €12 billion tranche of the €110 billion bailout package approved by the European Union and the International Monetary Fund in 2010. Without the highly unpopular bill, worth €28 billion ($40 billion) in belt-tightening measures, Greece will be forced to default on its massive debts, likely sparking turmoil in global markets.