Eurozone ministers: What is the fuss about?

In Background on June 16, 2011 at 8:15 pm

On 14 June, the Eurozone ministers could not agree on the form of the second bail-out package for Greece. The contentious point was the role of the private investors in it. Germany insisted Greece’s lenders should swap their bonds for new ones with extended, seven-year maturities. This would allow plenty of time to the Greek government to implement the necessary reforms in order to lead the economy out of the recession and in a path of growth, which will allow it to borrow from the markets.

This was not accepted by the European Central Bank, the European Commission and France. The reason was that although Brussels would call this bond-swapping “reprofiling” of loans, the credit agencies would interpret this as a pure and simple default. The ECB, both in the words of the current President Jean-Claude Trichet as well as the likely next head of the European Central Bank, Mario Draghi, stood firmly against anything which could be seen by the markets as a default. It claims this would cause panic (see US 2008 collapse of Lehman Brothers) and have serious repercussions for European banks. On 15 June (day of general strike in Greece), Moody’s announced that it might review the ratings of France’s three largest banks (BNP Paribas, Societe Generale and Credit Agricole) because of their exposure to Greek debt.

Instead the ECB was promoting the so-called “Vienna initiative”. This is an agreement which had taken place in order to contain the debt crisis in Eastern Europe in 2009. In effect, foreign banks had agreed not to cut their exposure to the region and run, and thus there was no spread of the  financial contagion in Central and Eastern Europe. In this scenario, any bond-swapping is purely voluntary.

The agreement among Eurozone ministers is now on the way. This was partly facilitated by the IMF’s decision to give the next payment of Greek aid of €12 billion on 29 June, on the basis of a “promise of future EU funding rather than any concrete commitments” (BBC news).


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