Sarkozy says French banks agree to roll over Greek debt

France offered a radical solution today for banks to roll over holdings of Greek debt for 30 years as the Athens government fought to get backbench rebels to back a crucial austerity plan to avert bankruptcy.

With depositors fleeing Greek banks in growing numbers and financial markets watching anxiously, French president Nicolas Sarkozy told a news conference in Paris that French banks had reached a draft agreement with the authorities on a voluntary rollover of maturing bonds.

"We concluded that by stretching out the loans over 30 years, putting (interest rates) at the level of European loans, plus a premium indexed to future Greek growth, that would be a system that each country could find attractive," he said.

Irish and Portuguese bond yields rose to records amid concern that the deal to provide extra aid for Greece will not be enough to prevent the debt crisis from spreading.

The plan, drafted by French bankers, was put to a meeting of international bankers and European Union officials with the International Institute of Finance (IIF) in Rome today but no decision was taken, an Italian Treasury official said.

In a sign of ebbing confidence that Greece can avoid default on its €340 billion debt mountain, Moody's said Greek banks had lost about 8 per cent of private sector deposits so far this year as customers burned their savings due to unemployment, transferred funds abroad or bought gold.

French government sources said under an outline deal, banks would reinvest 70 per cent of the proceeds when Greek bonds fall due in 2011-14 and cash out the rest. Of the amount reinvested, 50 per cent would go into the new 30-year bonds and 20 per ent would go into zero-coupon AAA bonds with deferred interest.

The new bonds would be placed in a Special Purpose Vehicle, effectively removing Greek debt from the balance sheets of participating banks, the source said.

Private banking sources said the new bonds could be guaranteed by the euro zone's rescue fund (EFSF) or the European Investment Bank. Banks would hold equity in the SPV instead.

German banks voiced interest in the "French model" although Deutsche Bank chief Josef Ackermann said it was only one of several solutions being considered and it was unclear whether any satisfactory proposal could be found.

"Political leaders expect a solution by the end of the week but we should not rush it," Mr Ackermann told Reuters Television in an interview. "It is important to have a good solution. The issues are complex and need to be discussed."

Any new financial rescue for Athens, including official lending and private sector participation, depends on the Greek parliament approving this week a five-year austerity plan and legislation to implement structural reforms and privatisations.

Greek finance minister Evangelos Venizelos met ruling socialist party (Pasok) rebels in Athens today to push them to toe the line in parliamentary votes on Wednesday and Thursday, where a defeat could plunge the country into default.

Greece's conservative opposition has rejected calls for national unity, forcing prime minister George Papandreou to rely on his slim parliamentary majority to push through a painful mix of spending cuts, tax hikes and state selloffs. However, with Greece stuck in deep recession, at least three Pasok deputies have expressed serious reservations or outright opposition to a plan they say will crush any hope of growth for years to come and it is unclear how the numbers will play out.

This morning, protesters hung a huge banner off the Acropolis, the ancient rock outcrop which dominates Athens, proclaiming: "People have the power, they never surrender".

Irish and Portuguese government bond yields rose to records amid concern that a deal to provide extra aid for Greece will not be enough to prevent the debt crisis from spreading.

German 10-year bonds slid, pushing up yields from this year's lows, on signs European banks are prepared to contribute to efforts to stave off a Greek default. Spanish and Italian securities outperformed benchmark bunds before Italy sells up to €8 billion of bonds tomorrow.

The yield on Irish 10-year bonds rose 13 basis points to 12.10 per cent as of 4.52pm in London after reaching a record 12.11 per cent. The 5 per cent securities maturing in October 2020 fell 0.50 to 61.565. Equivalent-maturity Portuguese bond yields jumped 30 basis points to 11.68 per cent.

The yield difference between Greek and Portuguese 10-year bonds narrowed to 512 basis points, the least since April 15th.

The yield on benchmark German bunds was six basis points higher at 2.89 percent. Spanish 10-year yields increased one basis point to 5.69 per cent and the rate on similar-maturity Italian debt was little changed at 4.98 per cent.

Bloomberg, Reuters