French banks, the most exposed to the Greek debt crisis, have reached an outline agreement to roll over holdings of maturing Greek bonds as part of a wider European plan to avoid sovereign default.
French President Nicolas Sarkozy confirmed the breakthrough today, while German bankers voiced their interest in the 'French model'.
The news came as international bankers met euro zone policymakers in Rome to discuss how the private sector can share the burden of a second rescue programme for Greece.
That meeting, which focused on the French plan and other options, ended without decisions, but an Italian Treasury official said none were expected at this stage.
Charles Dallara, managing director of the International Institute of Finance, a banking lobby, said in a statement participants 'engaged in a constructive exchange of views on Greece'.
Sarkozy told a Paris news conference that French banks would be offered 30-year Greek bonds with a coupon, or interest rate, equivalent to the euro zone's lending rate to Athens, plus a premium based on Greece's future economic growth rate.
Government sources said banks had offered to reinvest 70% of Greek debt maturing in 2011-14. The other 30% would be cashed out.
Of the amount reinvested, 50% would go into the 30-year bonds and the remaining 20% would go into zero-coupon AAA bonds that could be issued or guaranteed by the euro zone rescue fund (EFSF), the sources said.
The bonds might pay about the 3% interest which the European Financial Stability Facility pays to borrow in the market, but interest payments would be withheld, accumulated and paid when the bonds expire, they said.
The new bonds would be placed in a Special Purpose Vehicle, effectively removing Greek debt from the balance sheets of participating banks, the sources said.
Private banking sources said the bonds could be guaranteed by the euro zone's rescue fund (EFSF) or the European Investment Bank.
A French government source called the scheme 'a sort of private Brady bond without a public guarantee', in a reference to a 1989 swap of Latin American debt for tradeable securities, some of them guaranteed, proposed by then US Treasury Secretary Nicholas Brady.
EU leaders agreed last week that extra public financing to help Greece avoid bankruptcy would depend on the voluntary involvement of private sector bondholders in a way that did not cause a 'credit event' and that credit ratings agencies did not brand as a selective default.
A participant at the Rome talks said at least 20 international bankers met first at the offices of Intesa Sanpaolo before being taken by VIP minibuses to the Treasury for talks with Italian Treasury chief Vittorio Grilli, European Commission officials and the IIF's Dallara. Grilli chairs the Economic and Finance Committee which prepares decisions for euro zone finance ministers.
The Association of German Public Banks said in a statement: 'We are looking at the French model with great interest.'
'Greek contagion may be worse than Lehman'
Contagion of Greece's debt problems to the rest of Europe could be worse than the collapse of investment bank Lehman Brothers in 2008, Deutsche Bank chief executive Josef Ackermann said today.
Greece needs €12 billion in European and IMF aid to avoid a default on its debt mountain in mid-July that could spread contagion across the euro currency area and send shock waves around the world economy.
'If it is Greece alone, that's already big. But if other countries are drawn in through contagion, it could be bigger than Lehman,' he said at a Reuters banking conference today.
His words echoed statements top European Central Bank policymaker Juergen Stark made earlier, when he said the impact of a Greek debt restructuring on Europe's markets could eclipse the insolvency of Lehman Brothers, which marked the start of the global financial crisis.
