While the European Central Bank previously opposed allowing even a short-term or selective default for Greece, Dutch Finance Minister Jan Kees de Jager said that might now be a possible option. As European leaders work to prevent the further spread of sovereign debt problems, and discuss Greece’s second aid package, particularly how the private sector will be involved, a buyback of discounted Greek bonds is emerging as both a solution to Greece’s problems and a way of involving private investors.
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German (NYSE:EWG) President Angela Markel and French (NYSE:EWQ) President Nicolas Sarkozy are said to be responsible for crafting this new approach to the second Greek bailout, which is also said to have the approval of ECB President Jean-Claude Trichet. Meeting in their fifth summit this year to discuss options for dealing with Greece, European leaders will be more focused on preventing countries that have already received EU/IMF bailouts — Greece, Ireland, Portugal — from contaminating countries with significantly larger economies like Italy or Spain, which would put the euro in real danger.
The new bailout package will give Greece 115 billion euros in funding from the euro zone rescue fund and the International Monetary Fund, as well as private sector bondholders. The main goal of the new approach to handling Greece’s problems is meant to make the country’s debt more sustainable while preventing fears that a disorderly default would poison other European bond markets. While there will be legal and technical obstacles to allowing commercial banks to participate in the Greek bailout and bond buyback, the plan has presented itself as the best option for both the welfare of Greece and the rest of the EU.
IMF President Christine Lagarde will also be in attendance at today’s summit, and has told European leaders that they should put more money into the 440 billion euro European Financial Stability Facility, which could then buy government bonds from at-risk countries on the secondary market. The EFSF may also extend lines of credit to countries at risk. For the EFSF to buy bonds, the fund’s rules would have to be changed and then ratified by national parliaments.
Still, there’s no guarantee that today’s summit will meet an agreement on the Greek bailout, nor that it will allow both a selective default and private bond buyback. Furthermore, even after the bailout, the EU will still have to find a way of preventing against future debt crises. While many blame the EU’s common currency as the reason Greece has the potential to infect the economies of other euro zone countries, many economists are suggesting an even closer integration of national fiscal policies could prevent a recurrence of the sort of problems the EU has been facing with Greece. But Germany (NYSE:EWG), the EU’s strongest economy, has hitherto opposed any such step.
Meanwhile, Spain (NYSE:EWP) is working on solving its own problems before a bailout becomes necessary and its fate is taken out of its own hands. Today the at-risk country sold 1.8 billion euros of 10-year bonds and 814 million euros of 15-year bonds. However, because Spain has the potential to soon find itself in a situation like that of Greece, its Treasury had to pay high yields to investors. “In the long run, these are pretty punitive funding levels for Spain,” said Marc Ostwald, a strategist at Monument Securities.
However, rates at the auction were lower than had been expected earlier this week after yields fell on Wednesday in anticipation of today’s summit and a plan for the new Greek rescue package. Still, the yields on both the 10- and 15-year bonds were at their highest levels since 1997, a rate that analysts say won’t be sustainable. France (NYSE:EWQ) is also auctioning bonds, to better effect. France’s sale of 8 billion euros in short-dated bonds was well received, and more French auctions are expected, with there being particularly high demand for the 5-year note. Now check out which Companies have dangerous exposure to Greece and which Countries do too.