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2011-07-12 05:10:40
Jul 11th 2011, 23:48 by The Economist | Brussels
FOR THE first time since the start of the Greek debt crisis more than a year
ago, the finance ministers of the euro area are ready to consider a default by
Greece. They did not say so explicitly, of course, but the omissions from their
statement tonight were eloquent.
Amid alarm that contagion was spreading from Greece to Italy and Spain, finance
ministers held more than eight hours of crisis talks in Brussels, at the end of
which they declared in a statement (pdf) their absolute commitment to
safeguard financial stability in the euro area . The new French finance
minister, Fran ois Baroin, who replaces Christine Lagarde after her elevation
to run the IMF, declared that ministers had rediscovered the spirit of the
spring of 2010 , when they had first rescued Greece and created a 500 billion
fund to help other countries.
Such rhetoric should be disregarded. It serves mainly to hide the intense
disagreements that endure. The statement last night was filled with many
promises, among them the pledge to do more to improve the euro area s systemic
capacity to resist contagion risk . But it gave few specific details or a
timetable for action. This is unlikely to convince markets that the euro zone s
leaders are anywhere near resolving the crisis.
Until recently, the ministers thought they had averted imminent catastrophe. A
looming default by Greece has been delayed by a few months, following the
approval of the next tranche of EU/IMF loans, worth 12 billion. Ministers
thought they now had weeks, if not months, to figure out the precise form of a
second bail-out designed to preserve Greece until 2014 especially the way in
which private bondholders would be induced voluntarily to help roll over some
of Greece s debt.
But that illusion has been shattered by the spread of financial turmoil to
Italy, a country too big to bail out, and to Spain. Yields on the bonds of both
countries reached historic highs in today s trading.
All of a sudden, the ministers are willing to consider measures that, until a
few days ago, were deemed unthinkable. Most striking is the seeming abandonment
of the commitment to ensure that any private-sector involvement avoid anything
that might provoke credit-rating agencies to declare a selective default. Even
worse would be to trigger a credit event that would trigger a pay-out of
credit-default swaps (CDS), a form of insurance against default.
This is what the finance ministers said on July 2nd (pdf):
In line with the 24 June European Council conclusions, consultations with
Greece s creditors are underway in order to define the modalities for voluntary
private sector involvement with a view to achieving a substantial reduction in
Greece's year-by-year financing needs, while avoiding selective default.
And this is what they said last night (pdf):
Ministers welcomed the decision by the IMF to disburse the latest tranche of
financial assistance to Greece, as well as the proposals from the private
sector to voluntarily contribute to the financing of a second programme,
building on the work already underway. The ECB confirmed its position,
reaffirmed by its Governing Council last Thursday, that a credit event or
selective default should be avoided
Spot the difference? In the earlier statement, the ministers endorsed the
commitment to avoiding a selective default. Last night they merely recorded
that this is still the view of the European Central Bank, but did not ensorse
it.
This appears to confirm the revival of the original German plan to encourage
bond-holders to swap existing Greek bonds for new seven-year obligations. Amid
objections that this was too harsh, negotiations then focused on a softer, but
more complex French roll-over plan. This was criticised for doing too little to
help Greece, and too much to help the banks. In any case, it got the
thumbs-down from Standard & Poor s, one of the big rating agencies, which said
even this could prompt it to declare a selective default.
If any creditor involvement will draw an unfavourable opinion from the rating
agencies, Germany retorted, we might as well revert to our original plan. The
aim now is to ensure that the selective default period is as short as possible
days, if not hours to minimise disruption. The new red line is now to avoid
a credit event for CDSs. The reference to the ECB s opinion now looks more and
more like a dissenting opinion, though France still seems to be fighting a
rear-guard action against selective default.
And yet, even though the ministers now seem prepared to be tougher with
bondholders, they do not repeat the demand that the private-sector contribution
should be substantial . What this word means has never been defined, but the
figure of 30 billion worth of relief between now and 2014 was often mentioned
unofficially. The creditors are unlikely to offer anything close to that
figure.
Elsewhere, the ministers promised to seek steps to reduce the cost of
debt-servicing and means to improve the sustainability of Greek public debt .
Olli Rehn, the monetary affairs commissioner, says none of this should be
construed as a hint of an outright debt restructuring ie, imposing haircuts
on bondholders.
Instead, one means by which the burden could be lightened is to reduce the
interest rate that Greece pays, and to allow the main bail-out fund, the
European Financial Stability Facility (EFSF), to buy up the bonds of Greece and
other troubled countries on the secondary markets. This power had been excluded
earlier this year, when the lending capacity of the EFSF was boosted and the
fund was permitted to buy bonds in the primary markets.
Finally, the ministers nodded to Finland, whose government had insisted on
Greece posting collateral to secure any new loans. Most other countries thought
this would only complicate matters, particularly if it means tying up Greek
assets due for privatisation. Now they speak of a collateral arrangement where
appropriate . Quite what this means, nobody knows.
When will the details of all this be worked out? The statement speaks of
shortly and as soon as possible . But there are no dates, not even for
another emergency meeting of the Eurogroup which seems inevitable in the coming
weeks. They can hardly let matters drag out until September: that would
guarantee more contagion.