Europe Said to Weigh ECB Role to Narrow Gap in Financing for Greek Bailout

By James G. Neuger and Brian Parkin - Feb 17, 2012 2:22 AM GMT+0700
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A Greek flag reflected on smashed windows of a bank in Athens on Feb. 16, 2012. Photographer: Dimitri Messinis/AP

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Feb. 16 (Bloomberg) -- European governments are considering cutting interest rates on emergency loans to Greece and using contributions from the European Central Bank to plug a new financing gap in the second bailout program for Athens, two people familiar with the discussions said. David Tweed reports on Bloomberg Television's "Last Word" with Andrea Catherwood. (Source: Bloomberg)

European governments are considering cutting interest rates on emergency loans to Greece and using contributions from the European Central Bank to plug a new financing gap in the second bailout program for Athens, two people familiar with the discussions said.

Finance ministers wrangled over how to close the funding hole in a teleconference last night after seeing estimates that Greece’s debt would fall to 129 percent of gross domestic product in 2020, missing a target of 120 percent, said the people, who declined to be named because the talks are still in progress. Last year, the level was about 160 percent.

Overcoming the final obstacles and Greece meeting the conditions set by euro finance chiefs yesterday may enable the ministers’ next meeting on Feb. 20 to approve both the 130 billion-euro ($170 billion) lifeline and a bond exchange with private investors that is critical to staving off a Greek default in March, the German finance ministry told coalition lawmakers in Berlin today, three officials said.

As recriminations fly between Greece and its northern European creditors, the clock is ticking toward a March 20 bond redemption when Greece must pay 14.5 billion euros or trigger the first sovereign default in the euro’s 13-year history.

“We expect the Greeks to rise to their responsibilities,” German Deputy Finance Minister Steffen Kampeter said today to a group of lawyers in Hamburg. “This coming Monday, we will see whether Greece delivers or whether we will be forced to decide on another course of action, one that is not desired.”

Missing Targets

With Greece failing to meet financial targets, European authorities are discussing charging it lower rates, three officials said. Central bankers have indicated that the ECB could funnel future profits from its Greek bond holdings to national governments and on into the crisis program.

Greece obtained its first, 110 billion-euro loan package in May 2010 at rates averaging 5 percent. Euro governments have already cut that figure once, to about 4 percent in March 2011.

Central bankers have agreed that they “don’t wish to make a profit on Greece,” ECB Governing Council member Luc Coene of Belgium said this week. An ECB spokesman today declined to comment.

French Proposal

More controversial is a proposal for national central banks to take part in the private exchange by accepting losses on Greek bonds in their investment portfolios. France is virtually alone in backing that idea, one of the officials said.

The ECB is swapping its Greek bonds for new ones to ensure it isn’t forced to take losses in a debt restructuring, three euro-area officials said today.

The possible scenarios may lead to a possible two-step decision -- authorizing the bond exchange next week and then completing the 130 billion-euro public aid program -- that would raise political risks by requiring two votes in some national parliaments.

It would also turn a planned March 1-2 summit of European leaders into a showdown over Greece, after countries including the Netherlands and Finland called for delaying the full package until after Greek elections in April or later.

The Netherlands is pushing to saddle bondholders with bigger losses by reopening a “private sector involvement” or PSI agreement for investors to write off roughly 100 billion euros of Greek debt. Investors have agreed to terms with a loss of about 70 percent of the net present value of their holdings.

Bigger Writedown

“We don’t rule out a bigger PSI, but we clearly belong to a small minority on that point because the PSI that has been taken is a enormously big step,” Dutch Finance Minister Jan Kees de Jager told parliament in The Hague today.

The bond exchange can only go ahead once governments authorize the European Financial Stability Facility to provide 30 billion euros, to be used in cash or collateral as an incentive to investors.

Euro officials are targeting a window of Feb. 22 to March 9 to complete the transaction, the German lawmakers were told.

Greek leaders have no more “wiggle room” even as they seek to maintain a minimum level of public support going into elections that may take place in April, Deutsche Bank economists Gilles Moec, Marco Stringa and Mark Wall wrote in a note to clients today.

To contact the reporter on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Brian Parkin in Hamburg at bparkin@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net