Thursday, June 30, 2011

Facilitating a default

June 30, 2011

The biggest private Greek creditors are now in the bag. Days after the circulation of a plan drafted by French banks to roll over much of the Greek debt that they hold, German banks said that they would do much the same. No details are available, largely because they have yet to be thrashed out, but Joseph Ackermann, the boss of Deutsche Bank, and Wolfgang Schäuble, Germany's finance minister, said that they had agreed in principle that €3.2 billion ($4.6 billion) would be rolled over.

Exactly what will be done is still a bit of a mystery to both the banks and German politicians. This is because the plan that must emerge by Sunday will, like the existing French plan, probably be a fiendish construct designed by lawyers and accountants to deliver some relief to Greece without triggering a declaration by credit-rating agencies that the country is in default. Even if the details are fuzzy, the broad parameters of it seem clear. People close to the talks say that German banks (like their French counterparts) insist that they will only agree to a deal which, in accounting terms, does not force them to write down the value of the Greek bonds they hold.

Thus the German plan is likely to follow the broad outlines of the French one, with Greece borrowing more than it needs and setting some aside by buying safe collateral that could be used to repay banks part of their money if the country defaults. The interest rate that Greece has to pay will probably also be similar to the 5.5-8% proposed under the French plan, although in cash terms Greece would be paying a higher rate for the duration of the rollover because it would also be paying interest on money set aside as collateral.


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