Euro zone ministers pressed ahead on Tuesday with plans to make Greece's private creditors share the costs of a second aid package amid ECB warnings that any coercive solutions could unleash a new wave of contagion. Finnish Finance Minister Jyrki Katainen said at the start of a meeting with his single currency counterparts in Brussels that some form of private sector involvement was important.
But he echoed the views of his Austrian and Belgian colleagues in stressing that eurozone governments must take care not to unsettle financial markets, already unnerved by the prospect of Greece defaulting on its massive debt pile. "Most of the countries have indicated that some form of private sector involvement is crucial," Katainen said. "I want to underline that we have to avoid, whatever it takes, the next financial crisis. The balance is very difficult."
Ahead of a summit of EU leaders on June 23-24 at which a new aid package for Greece is expected to be finalised, Germany is pushing its partners to agree to a bond swap that would push out the maturities on Greece's debt by 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. 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.
Greek, Portuguese and Irish 10-year bond yields all pushed up to euro lifetime highs on Tuesday 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 ($160 billion) 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, the 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.