Investors in Greece Face Bigger Losses

EU hints at larger bondholder role in euro-zone’s bailout of Greece.

European governments dropped clues that bondholders may have to take bigger losses on Greek debt in a second aid package, as Greece’s deteriorating economic outlook forces bolder steps to quell the fiscal crisis.

Finance ministers considered reshaping a July deal that foresaw investors contributing 50 billion euros ($66 billion) to a 159-billion euro rescue. That private sector involvement, or PSI, includes debt exchanges and rollovers.

“As far as PSI is concerned, we have to take into account that we have experienced changes since the decision we have taken on July 21,” Luxembourg Prime Minister Jean-Claude Juncker told reporters early today after chairing a meeting of euro finance chiefs in Luxembourg. “These are technical revisions we are discussing.”

Together with plans to get more firepower out of the region’s 440 billion-euro rescue fund, the review of Greece’s aid package was a response to growing international frustration with Europe’s inability to get to grips with the crisis after 18 months of incremental steps. Europe’s woes contributed to last quarter’s slump in global stocks, the biggest since the aftermath of the 2008 collapse of Lehman Brothers Holdings Inc.

Juncker gave no details about a possible recalibration of the debt exchange. The talks came after seven countries including Germany, Europe’s dominant economy, weighed calling for Greek bond writedowns of as much as 50 percent, two European officials said.

Decision Postponed
The ministers also pushed back a decision on the release of Greece’s next 8-billion euro loan installment until after Oct. 13. It was the second postponement of a vote originally slated for yesterday as part of the 110-billion euro lifeline granted to Greece last year.

“The endgame for Greece has now begun,” Sony Kapoor, managing director of policy group Re-Define Europe, said in an e-mailed note. “It seems that the ground is being laid to revisit the private sector involvement agreement reached in July.”

European stocks and the euro fell yesterday and investors shunned riskier countries’ bonds amid concern that the crisis is careening out of control. Europe’s financial leaders are fighting on multiple fronts, trying to repair Greece’s economy while insulating Italy and Spain and shoring up banks that the International Monetary Fund says face as much as 300 billion euros in credit risks.

Euro’s Drop
The euro has dropped about 8 percent since the end of August, trading at $1.3191 as of 12:38 p.m. in Tokyo. Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Sydney, said “there’s so much uncertainty still over Europe and the way forward that you can’t be confident” the euro will hold above $1.30 by year-end.

“There’s still a sense that they’re stalling and unwilling to go through with their agreement from July 21 in terms of the bailout for Greece and that’s creating a sense that Greece is closer to default or they may be forced into some bigger default arrangement,” Gibbs said.

Scrounging for savings, the Greek cabinet on Oct. 2 announced 6.6 billion euros of cuts, mostly by slashing public payrolls. Greece will “very likely” have to make extra reductions for 2013 and 2014, a two-year phase that will be the focus of the rest of the review by European Union, European Central Bank and IMF officials, EU Economic and Monetary Commissioner Olli Rehn said.

Deficit Goal
Greece’s revised 2011 deficit goal may be 8.5 percent of gross domestic product compared with a previous target of 7.6 percent, Rehn said. He called the new target “plausible” and lauded Greece’s “important steps” toward further savings next year.

While an Oct. 13 meeting to decide on the next payout was canceled, Juncker said he is “nevertheless optimistic when it comes to the issue of the disbursement.” The decision now dovetails with an Oct. 17-18 summit of European government leaders to address the crisis.

“Greece is not the scapegoat of the euro zone,” Greek Finance Minister Evangelos Venizelos said. “Greece is a country with structural difficulties.”

Fund Firepower
Finance ministers held a first discussion over how to further enhance the region’s rescue fund, setting aside a plea by German Finance Minister Wolfgang Schaeuble to postpone that debate until the remaining countries have endorsed the fund’s latest upgrade.

Fourteen of the 17 euro countries have approved the reinforcement, which will empower the European Financial Stability Facility to buy bonds on the primary and secondary markets, offer precautionary credit lines and enable capital infusions for banks.

Juncker announced “good progress” on the credit lines and bank-recapitalization tools. Avoiding the word “leveraging,” he said work is under way to scale up the fund’s capacity without requiring each country to chip in more.

“We are checking if yes or no we could increase the efficiency of the different instruments,” Juncker said. Asked whether the ECB would be tapped to boost the fund’s clout, he said: “I don’t think that this will be the main avenue of our considerations.”

Finnish Deal
The ministers also smoothed a snag en route to a second Greek package by settling the terms under which collateral will be offered to AAA rated Finland, home to a euro-skeptic movement that catapulted to third place in April elections by opposing further bailouts.

While the party now known as “The Finns” didn’t make it into the ruling coalition, it captured the Finnish mood and hardened the stance of new Prime Minister Jyrki Katainen in the euro-rescue bartering.

Under the accord, Greek bonds will be transferred from Greek banks to a trustee, which will sell them and invest the proceeds in AAA rated bonds with maturities of 15 to 30 years.

In exchange for the special treatment, Finland will speed its payments into a planned permanent rescue fund and forego a share of profits from EFSF emergency loans. In the event of default, it couldn’t cash in on the collateral until Greece’s official loans mature, possibly as long as 30 years.

“It’s a complicated financial structure,” said EFSF Chief Executive Officer Klaus Regling, who brokered the collateral arrangement. He and Juncker said Finland is the only country likely to take advantage of it.

Regling deserves “the Nobel prize for economics or the Nobel peace prize” for engineering the compromise, Rehn said.

Bloomberg News

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