The leaders of Germany and France have agreed that private creditors should participate in a new rescue program for Greece by voluntarily agreeing to roll over their holdings of Greek government bonds.
Details of such an arrangement still have to be finalized by eurozone finance ministers, but the agreement in principle on a rollover - rather than a fully fledged bond exchange including longer maturities, favoured by Germany - was announced in Berlin on Friday by Angela Merkel, German chancellor, and President Nicolas Sarkozy of France.
It amounts to a retreat by the German government, in the face of fierce resistance by the European Central Bank, as well as the French government.
At a press conference in her office in Berlin, Ms. Merkel said that the “Vienna initiative” of 2009 - when banks agreed to maintain their lending exposure in central Europe - was “a good foundation” for a deal.
The news helped revive the euro, which rallied from a session low of $1.4125 (U.S.) to trade up 0.4 per cent at $1.4266. European financial stocks also saw buyers, contributing to a rebound for the FTSE Eurofirst 300 of 0.5 per cent to 1,090.2.
The devil remains in the detail of any such agreement, and Germany is still pushing for the maximum possible participation of private bondholders. Both France and the European Central Bank have resisted any arrangement that would cause Greece to be classified by rating agencies as in default.
Berlin has said any deal must be “substantial, quantifiable, reliable and voluntary,” whereas a simple voluntary rollover would be very difficult to quantify, according to European Commission calculations.
Wolfgang Schäuble, German finance minister, has said he hoped for an effective contribution from private creditors of some €30-billion towards a total package of €120-billion, and Jan Kees de Jager, his Dutch counterpart, has said private creditors should provide one-third of the total relief to Greece.
Mr. Sarkozy set out the four principles of any deal on which he and Ms. Merkel had agreed when they met in Berlin on Friday. He said it should be voluntary, it should not trigger a “credit event” in the financial markets, it should have the backing of the ECB, and it should be agreed rapidly.
Asked if the deal would be identical to the Vienna initiative, or be a more ambitious “Vienna plus” arrangement to provide more extended relief to the Greek government, he said: “To say we are in the spirit of Vienna suits me very well.”
Ms. Merkel also stressed repeatedly that the deal should be “voluntary”, which has long been the official German position. However the financial market rating agencies have argued that a bond-exchange would contain clear elements of coercion, and therefore be classifiable as a default.
“The central principle is voluntary contribution,” she said. “That is an important message to the banks. There are concerns that we want to trigger a credit event. We do not want that. We cannot run such a risk.” She said that everything should be agreed with the ECB, as well as the International Monetary Fund and European Commission involved in designing a new Greek rescue package.
The chancellor spelt out her backing for George Papandreou, the Greek Prime Minister, in his efforts to win parliamentary approval for the new program, and urged the conservative opposition in Athens to support the package.