Alarmed by a worsening of the euro zone debt crisis, policymakers and bankers are examining radical proposals to rescue Greece that include a sharp cut in its debt burden, ways to prop up banks and a new emphasis on boosting Greek growth, official and banking sources say.
They are far from reaching a consensus. There is no agreement so far on how private investors would contribute part of the cost, or even on when euro zone leaders will next meet to discuss the rescue.
But the proposals appear to be a step forward because they indicate talks are now focusing on a comprehensive settlement that would seek to end financial market uncertainty over Greece immediately, rather than - as with previous rescue plans - keeping Greece afloat until a permanent solution can be found months or years from now.
“Markets are driving this debate, no longer politicians,” said one banker.
“We have to find a comprehensive solution for the life- threatening crisis in Greece. There's a chance to find a solution over the next weeks.”
Greek Prime Minister George Papandreou referred to the push for a comprehensive plan, which some European Union officials hope to agree by the end of this month, at a cabinet meeting in Athens on Thursday.
“It is positive that in recent days our partners in Europe are discussing increasingly, and pressing for, comprehensive solutions,” he said.
Various governments and banks in the talks emphasise different aspects of such a settlement, but the outline is as follows:
* Action to cut Greece's 345 billion euro debt mountain, rather than simply lending money to Greece so it can continue servicing the debt in the hope it can eventually grow its way out of the problem. This might come in the form of a swap of Greek sovereign bonds for new ones, or a buy-back of bonds. Either way, the terms of the scheme would probably mean private investors accepted a cut to the face value of their holdings.
* Steps to recapitalise European banks, especially Greek ones, which are too weak to cope with losses on their Greek bond holdings, as well as measures to ensure continued funding for banks which are cut off from the markets.
* A long-term plan to revitalise Greece's economy, focusing on growth rather than just cutting its budget deficit.
* More official loans to Greece and relief in the form of lower interest rates or longer maturities on such loans.
ALARM
The change of approach towards Greece emerged during the past week as a surge in Italian and Spanish bond yields, and further downgrades of the credit ratings of Portugal and Ireland, made it clear that the lack of a comprehensive solution threatened to drag bigger countries into the debt crisis.
“The big game-changer is that for the first time since I became minister, it is quite clear that everyone around the table in ecofin (European finance ministers) now is seeing the problem as a European problem and as a euro problem rather than...the problems of the individual programme countries,” Irish Finance Minister Michael Noonan said on Thursday.
“The focus of the problem has changed.”
The shift was signalled at a meeting of the 17 euro zone finance ministers on Monday when, reversing a position they took three weeks earlier, the ministers declined to rule out a bailout of Greece that would caused credit rating agencies to declare a limited or “selective” default.
This cleared the way for schemes that could potentially deliver cuts to Greece's debt pile, such as a bond swap - promoted by Germany - or a debt buy-back.
Big technical and legal obstacles would have to be overcome for any such scheme; to allow Europe's bailout fund to buy bonds, for example, national parliaments of contributing states might have to be consulted and Greek domestic law might have to be changed to compel bond holders to accept the offer.
It is also unclear whether any private sector scheme could reduce Greece's debt enough to save the country. Policymakers and economists have estimated its sovereign debt would have to be roughly halved to 80 percent of gross domestic product to be manageable over the long term.
That would mean a reduction of about 170 billion euros. Private investors inside and outside Greece are estimated to hold some 190 billion euros of its debt in terms of face value; even a 50 percent cut to that, which is one proposal raised in the talks, would only lower Greece's debt by 95 billion euros.
Official investors which hold the rest of Greece's debt - governments and central banks around the world, and the International Monetary Fund - might therefore have to be asked to accept losses. This would be politically difficult to accept, not least for European donor governments facing angry taxpayers.
But in contrast to a few weeks ago, the idea of a major restructuring of Greek debt is now on the table. In recent days, euro zone officials have been listening to the advice of European banks on the issue, sources told Reuters.
“What's different from before is that debt stock reduction is considered to be desirable - it is now one of the options,” said one source with knowledge of the matter, cautioning however that less extreme steps might still be chosen.
BANKS
If a way to cut Greece's debt burden can be found, other parts of a comprehensive solution might be agreed relatively easily.
It is unclear how Europe would ensure that banks hit in a Greek restructuring were recapitalised, but the terms of current international bailouts of Greece, Portugal and Ireland include provisions for some of the money to be used to strengthen banks.
The governments of Europe's donor countries appear to be shifting from an emphasis on forcing Greece to cut its budget deficit quickly, and punishing the country for its profligacy, to providing more help in pulling it out of recession.
Greece now expects EU authorities to frontload the release of development aid for the country and to waive the requirement for a Greek contribution to new development projects. Athens has also hinted thata new tax bill, tobe revealed in coming months under the supervision of the EU and the IMF, may includebreaks for companies to boost investment and growth.
EU officials have previously said Greece could obtain up to 60 billion euros of official emergency loans in a new bailout, in addition to the 110 billion euro rescue plan launched last year. Euro zone finance ministers indicated on Monday that the new loans would come with longer maturities and cheaper rates.
The biggest remaining obstacle to a Greek settlement may be the European Central Bank, where President Jean-Claude Trichet has insisted the ECB will not accept any declaration of default for Greece, and could cut Greek banks off from money market funding in response to one.
This obstacle is unlikely to be showstopper, however. If the ECB does not back down, EU officials have suggested governments could simply override it, as they did earlier in the euro zone crisis; other ways could be found to support Greek banks, such as an Emergency Liquidity Assistance facility run by the national central bank.
It is also possible that the ECB's next president Mario Draghi, who will take over in November, could be more willing to compromise. - Reuters