Caution over Greece bailout move

The Government has given a cautious welcome to a French initiative to help Greece avert default by extending some of its debt for as long as 30 years.

The plan, unveiled yesterday by President Nicolas Sarkozy, is supported by French banks, who have the greatest exposure to Greek sovereign debt.

It came as the political turmoil in Greece drove notional Irish borrowing costs to a new record and MPs in parliament in Athens debated a key vote on a €78 billion austerity and privatisation plan.

"Any resolution to the Greek difficulties is to be welcomed as it is in the best interests of the EU as a whole," said the spokesman for Minister for Finance Michael Noonan.

He declined to discuss whether any of measures agreed in Paris might be deployed by Ireland in the future, saying his previous remark applied to all questions about the initiative.

Conscious that there have been many false dawns before in the sovereign debt crisis, Dublin is known to be concerned Greek instability could derail its own plan to return next year to private debt markets.

The yield on Irish 10-year bonds rose 0.13 percentage points to 12.10 per cent yesterday evening in London after having reached a record 12.11 per cent.

The French plan, hailed by Mr Sarkozy as a breakthrough in the divisive effort to enlist private creditors into the Greek bailout, is being examined by German investors.

It came as the European authorities urged non-euro zone banks to participate in the rescue effort at a meeting in Rome of the Institute of International Finance, the global banking lobby.

"We won't let Greece fall. We will defend the euro, because it is in all of our interests," Mr Sarkozy said.

The French plan would see the banks reinvest in Greek sovereign bonds with longer maturities. It follows talks between the French finance ministry and the financial institutions.

The banks – which are known to include BNP Paribas, Crédit Agricole and Société Générale – would roll over a majority of their Greek bonds maturing in 2011-14 for 30 years in exchange for guarantees.

Although the amount of privately held debt that may be renewed remains unclear, European sources say it may reach some €30 billion.

Private creditor involvement is a pre-requisite for German backing for a second Greek bailout.

Both the second bailout and the existing rescue plan are contingent on parliamentary support for an austerity package and privatisation plan.

The French banks would agree to extend the maturity of their Greek debt in exchange for rolling over less than 100 per cent of the debt. Greece would repay €30 for every €100 of maturing debt. From the remaining €70, banks would roll over €50 for 30 years and place that debt in a Special Purpose Vehicle – a legal entity established to hold such debt.

The final €20 would be reinvested in zero-interest triple A-rated bonds, the security of this money being the compensation for the risk in the vehicle. The banks would receive equity in the vehicle, taking the bonds off their balance sheets.

There would be no public sector guarantee for this vehicle, and banks could not immediately trade the bonds inside on the open market. However, the banks would be rewarded with extra interest tied to Greece's annual growth rate.

France said the scheme would be for all creditors, and wanted insurers and pension funds to participate.

Although Paris has stressed that any private sector involvement would be on a voluntary basis, a senior Élysée Palace official said it was clear "all financial institutions have an interest in the stability of the euro zone" and Greece.

"If it had not been voluntary, it would have been seen as a default, with the risk of a cascade into a huge disaster," Mr Sarkozy said.

Pledging to exercise control over France's own debt, he said: "I wasn't elected so that France would experience the agony of Greece, Ireland and Portugal."