22nd Mar 2019

Merkel, Sarkozy back 'voluntary' private-sector involvement in Greek rescue

  • Sarkozy (l) and Merkel flanking the Greek leader at an EU summit in 2010 (Photo:

Germany and France have come to an accord over the role of private bondholders in a second round of financial assistance to Greece, with Berlin appearing to back down somewhat over its insistence that the private sector bear losses.

Meeting in Berlin, German Chancellor Angela Merkel and French President Nicolas Sarkozy said that the private sector should be involved but only on a voluntary basis, a common position that aims to put an end to the public row between Berlin and the European Central Bank over the scale of private involvement.

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"There are worries that we want to cause a credit event," Merkel told reporters alongside her French counterpart after the two-hour meeting. "We do not want that. This is about a voluntary participation."

Last week, German finance minister Wolfgang Schaeuble wrote to his counterparts across Europe arguing that bondholders should immediately swap their bonds for new ones with extended, seven-year maturities, giving Greece longer to resolve its debt troubles.

The ECB for its part, backed by France and the European Commission, are arguing for something akin to the so-called 'Vienna Initiative' - a milder form of debt swap, in which bondholders rollover their debt but only when their existing bonds mature.

The central bank has argue that the German plan cannot be construed as a voluntary restructuring and would amount to a default, causing market panic that could spread throughout the eurozone periphery.

Merkel now appears to support the latter option, saying: "The Vienna Initiative ... is a good foundation and I believe that we can move forward on this basis."

However, neither leader gave any details as to the nature of a final agreement.

The pair backed a four-point framework for such a deal. Whatever is decided, it must be done quickly; it must involve agreement with the ECB; private bondholder involvement must be voluntary and a ‘credit event, or default must be avoided.

"This should be worked out jointly with the ECB," Merkel said. "There shouldn't be any dispute with the ECB on this."

Germany's exposure to Greek debt, at 26.3 billion in government bonds and 10 billion in private loans, including to banks, is a little over half that of that of France, and has argued that private creditors bear more of the burden of resolving the solution.

France, for it part, is owed €19 billion in government bonds and a full €42.1 billion in private loans. Three of its biggest banks this week saw their credit rating placed on review for a downgrade by Moody's as a result of this exposure.

The ECB, for its part, is exposed to the tune of €40 billion in government bonds and €110 billion to Greek banks.

A commission paper leaked to the Financial Times last week appears to have weighed heavily on German thinking. The document suggested that a less voluntary option for private bondholders would be assessed as a default, immediately excluding Greek banks from using government bonds as collateral at the ECB, pushing the banking system to the wall.

Such a development would mean that Greece's entire economy would in effect have to be bailed out, a much more expensive option than the Franco-ECB plan.

Also on Friday, Greek Prime Minister George Papandreou unveiled an expected reshuffle of his cabinet, firing his finance minister.

Defence minister Evangelos Venizelos, has replaced George Papaconstantinou in the finance ministry.

Amongst other moves, Stavros Lambrinidis, the head of the Greek centre-left Pasok MEPs in the European Parliament, has been made foreign minister.

In a surprise move, Papandreou failed to appoint a series of non-partisan technocrats to ministerial positions, a move that had been hinted at as a sweetener for the opposition and encourage them to join a national unity government as demanded by the EU-IMF-ECB troika.


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