June 14, 2011
A German-inspired plan to reschedule Greek debt could force eurozone governments to provide up to an extra €20bn to avoid a meltdown of its financial sector, European finance ministers have been warned.
A briefing paper circulated by the European Commission, and seen by the Financial Times, warned the extra money may be needed to recapitalise Greek banks following a proposed maturity extension of Greek government bonds, which would be classified by rating agencies as a “selective default”.
A further cash reserve may be required for emergency Greek bank liquidity if the European Central Bank refuses to accept downgraded bonds as collateral. Ministers have been told all the Greek collateral – some €70bn – might have to be replaced.
Opponents of Greek default, led by Europe’s central bankers, warned of the German debt exchange plan’s drawbacks.
“If despite everything you try to reduce the debt and you provoke a risk of default, you’ll have to finance the entire Greek economy,” said Christian Noyer, Bank of France governor.
“All in all, the costs seem to outweigh the benefits,” said Mario Draghi, incoming ECB president. The ministers, meeting in Brussels on Tuesday, are looking to involve private creditors in a new Greece rescue programme, to gain parliamentary support in countries such as Germany, the Netherlands and Finland without precipitating a disorderly default by Athens.
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