As workers in Greece prepare for a general strike today (15 June), EU finance ministers yesterday night failed to reconcile a German-led push for bondholders to share part of the cost of a new Greek aid package, amid warnings from the European Central Bank (ECB) that any coercive solutions could unleash a new wave of contagion.
"There has been no result," German Finance Minister Wolfgang Schaeuble told reporters after talks in Brussels which ended late yesterday. Eurozone finance ministers agreed to meet again on 19 June.
Ministers did concede that some progress was made despite the lack of agreement. "We are very close to an agreement with all private partners. But there must be a balance: a real effort on Greece's part – help from the IMF, the euro zone and the European Union; and participation of the private sector," said Belgian Finance Minister Didier Reynders.
Finnish Finance Minister Jyrki Katainen said that most countries indicated that some sort of private sector involvement was crucial.
"I want to underline that we have to avoid, whatever it takes, the next financial crisis. The balance is very difficult," declared Katainen.
Ahead of a summit of EU leaders on 23-24 June at which a new aid package for Greece is expected to be finalised, Germany is pushing for Greek bond maturities to be extended for seven years, giving it more time to right its economy and sell off state assets.
Rating agencies have warned they would see such a step as coercive and akin to a default.
German Chancellor Angela Merkel and French President Nicolas Sarkozy will meet on 17 June in Berlin, with pressure mounting for the leaders to resolve their differences over a rescue for Greece, which was downgraded this week to the world's lowest credit rating by Standard & Poor's.
The European Central Bank also opposes Berlin's plan and is pressing the bloc to opt for a softer solution that would seek contributions from the banks, pension funds and insurance firms that hold Greek debt on a "purely voluntary" basis.
"Somebody has to concede ground over the coming days or the region will experience a full-blown financial crisis," said David Mackie, an economist at J.P. Morgan.
Debt yield spike
Greek, Portuguese and Irish 10-year bond yields all pushed up to euro lifetime highs yesterday and the cost of insuring Greek debt against default reached a new peak amid worries about the deadlock on Greek aid.
China's central bank used its annual financial stability report to sound one of its starkest warnings yet about Europe's debt mire, saying a series of rescue measures had helped stabilise the situation but not tackled the root causes.
"The sovereign debt crisis could continue to weigh on Europe's economic recovery," it said. "There is a possibility that the sovereign debt crisis will spread and deteriorate."
The European Union and International Monetary Fund bailed out Athens to the tune of 110 billion euros just over a year ago, and followed up with similar packages for Ireland and Portugal.
A new Greek rescue is now being thrashed out as it continues to sink under a debt pile that totals roughly 150 percent of its annual output.
The new deal being discussed would keep Greece funded through 2014 and total 120 billion euros, including 60 billion euros in new EU/IMF aid and an equal amount from a combination of privatisation receipts and private sector contributions.
Mario Draghi, head of the Bank of Italy who is due to take over as president of the ECB later this year, reiterated at a European Parliament hearing that the central bank remained opposed to any private sector solutions that contained an element of compulsion.
But he signalled the ECB could accept a "Vienna Initiative"-style voluntary debt rollover, in which banks that hold Greek debt agree to buy new bonds as their holdings mature.
"There are basically two initiatives that are under discussion. One is the Vienna Initiative, which to me looks entirely voluntary," Draghi said.
Sources say France also favours a less sweeping form of private sector involvement than Germany, along the lines of the Vienna Initiative under which international lenders agreed to boost credit to the region and the main commercial banks agreed to maintain exposure and roll over credit lines.
There are signs that European banks holding billions of euros in Greek debt are moving towards an agreement along those lines, although ECB policymaker Ewald Nowotny cautioned that there were big differences between the 2009 initiative and what faces Greece.
A resolution may have to wait until Friday, when German Chancellor Angela Merkel and French President Nicolas Sarkozy meet in Berlin. Regardless of what deal emerges, many economists believe Athens will struggle to avoid a harsher restructuring in the years ahead.
Greece became the lowest-rated sovereign borrower in the world according to Standard & Poor's, which downgraded it on Monday and warned that any attempt to restructure the country's debt would be considered a default.
The Greek government is trying to push through new austerity measures worth some 6.5 billion euros for 2011 alone, almost doubling the belt-tightening already agreed for this year.
Protesters vowed to cordon off parliament to prevent deputies from debating the measures and unions are vowing to bring the country to a standstill in a national strike on Wednesday.
EURACTIV with Reuters