Germans plan for Greek debt shake-up

Financial Times
April 15, 2011

Germany is drawing up plans to restructure Greece’s sovereign debt in the event that Athens’ economic reforms fail to heave the country out of its budget crisis.

Its intentions fly in the face of the European Central Bank, which fears that asset write-downs could trigger a financial crisis at a time when the banking system is still bruised from the last one.

But Berlin reckons it and eurozone partners could avoid such desperate straits if they persuade Athens to offer bondholders a voluntary restructuring with tools used before by the International Monetary Fund.

One idea is to encourage bondholders to swap risky Greek sovereign bonds at about market prices for safer paper guaranteed by the eurozone – akin to “Brady Bonds” issued to South American countries in the 80s.

Alternatively, a eurozone trust – possibly the European financial stability facility – could buy bonds, and extend maturities or retire debt, a system used to help poor states in the IMF’s HICP programme. People briefed about Berlin’s thinking said other options were considered but chancellery and finance ministry officials had spent time analysing these “market friendly” options.

“The government has long since started preparing for a Greek restructuring,” one of them told the Financial Times. “But it’s not pushing Greece into this. It knows that none of these plans will work if the Greeks don’t want them.” The finance ministry said it could not comment.

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