Germany puts bond swap idea back on table

Germany wants to put a Greek bond swap back on the table as a model for private sector involvement in fresh aid for Athens, Deputy Finance Minister Joerg Asmussen told Reuters Insider TV on Wednesday.

“The model put forward by some French banks is still a good base for discussions and we are currently working on this,» Asmussen said in the interview, referring to a proposal to roll over Greek debt.

“But since rating agencies have signalled that they will consider modalities (such as) the French proposal as a selective default — that means a rating event — we can also put other options like a bond exchange on the table,» he said, adding discussions would take place over the summer break.

Finance Minister Wolfgang Schaeuble wrote to his eurozone colleagues, the European Central Bank and International Monetary Fund last month demanding that banks holding Greek bonds swap their bonds for new ones with maturities seven years longer.

But rating agencies signalled then that such a step would be akin to a rating event and the ECB, European Commission and France pushed for a softer solution involving a voluntary debt rollover, prompting Germany not to insist on its bond swap idea.

Asmussen said the French model may set «too clear» incentives for private creditors to participate. Work was being done to modify the proposal, especially with a view to lowering the interest rate Greek would pay on its debt, but other options including the bond swap would also be considered.

“First, one has to look how can one modify the French proposal in a way that it is still attractive to financial institutions,» Asmussen said.

“But one element one needs to look at is the interest rate that Greece has to pay because the higher the interest rate, the more negative it is for the debt sustainability situation of the country,» he added.

If a rating event — a debt downgrade — is not avoidable, it should be limited to a short period of time, Asmussen said.

“Then the question is ‘can we limit the period of this rating event to a very short period of time?’. This is the key: what can we do to limit this period to probably a few weeks or even days?» Asmussen said.

He added that while the volume of outstanding Greek credit default swaps was limited ? at around 4-5 billion euros ? it still bore a systemic risk.

“The question is it’s somehow unclear because of a lack of statistics who holds these CDS… so there is a limited but not negligible systemic risk here and that is why in any case, if we pursue private sector involvement, we are going to avoid a credit event,» Asmussen told Reuters.


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