June 14, 2011
The 17 finance ministers of the eurozone face a dilemma – as much political as practical – in seeking to agree on a new rescue programme for Greece.
The ministers have to decide how to involve private creditors in any rescue without destroying the country’s credit rating by so doing. It is a political issue with difficult technical consequences.
Germany and several of its most fiscally prudent allies, such as the Netherlands, are adamant that private creditors must pick up part of the cost if they are going to persuade their national parliaments to back a new deal.
Jan Kees de Jager, Dutch finance minister, wants them to pay at least 30 per cent of the bill.
But according to a background paper produced for ministers by the European Commission, the more pressure there is on private bondholders to participate, the more likely a downgrade of Greek debt to “selective default” is.
Indeed, the fundamental principles of a private sector involvement in the Greek programme – such as maximum creditor participation on a voluntary basis, debt sustainability, and avoiding the risk of a “credit event” or “selective default” – are “mutually inconsistent”, the document warns.
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