Fruitless talks mean Greek rescue may be weeks away

EURO ZONE finance ministers are discussing whether they might attempt to run the gauntlet of a “selective default” rating on Greece as they seek private creditor participation in a second bailout for the country.

Well-placed officials said the ministers are looking into the feasibility of pressing ahead with a French burden-sharing initiative even though rating agency Standard & Poor’s (S&P) warned this week such a scheme would prompt a default rating.

This raises the prospect of a big escalation of tension with the European Central Bank, which remains implacably opposed to any manoeuvre which results in a selective default on Greek debt. The ECB’s stance is grounded in the fear of dangerous contagion in financial markets in the event of a sovereign default.

After days of fruitless talks this week on private creditor participation in a second Greek rescue, officials acknowledge agreement may not be possible for several weeks.

The lack of progress has fanned renewed volatility on markets, with the yield on Irish 10-year bonds close to 13 per cent yesterday and the yield on two-year paper at a record 16.74 per cent.

The relentless rise in notional Irish borrowing costs defies the Government’s efforts to differentiate Ireland from Greece. Dublin fears its planned return to market investors could be derailed if the debt crisis is not brought under control.

Euro zone officials now say a burden-sharing deal may be impossible if ministers do not abandon the principle of proceeding only on the basis that rating agencies do not declare a default.

At a teleconference last Saturday, the ministers resolved any burden-sharing scheme must avoid selective default if is to be acceptable. They will discuss on Monday whether to abandon that principle.

S&P underscored the difficulty of realising the no-default objective in its assessment of the French plan. The dilemma is intensified by the tough stance of the Dutch and German governments on the necessity of private creditor participation.

Germany is known to be demanding a quantified, substantial contribution from private investors and it is again pressing for a debt-swap deal.

The Netherlands hardened its position this week when finance minister Jan Kees de Jager said private creditors should be compelled to take part if voluntary participation could not be secured.

"We need to accept that a voluntary contribution is not realistic," he told Dutch newspaper Het Financieele Dagbladon Thursday.

“If a compulsory contribution from the banks leads to a short and isolated rating event [a credit rating downgrade], then that is not so bad.”

Mr de Jager reiterated that stance yesterday, saying The Hague has not changed course. His position is in direct conflict with that of the ECB, whose chief Jean-Claude Trichet declared two days ago the bank was not for turning as regards default.

Euro zone officials are now drawing distinctions between a move which would lead to a “rating event” and a “credit event”. Both are highly risky, although the former, a temporary or selective default, is perceived to be less severe, as a credit event would lead to payments on Greek credit default swaps.

The ministers gather in Brussels on Monday afternoon for scheduled talks, a meeting at which they had been expected to sign off on a new bailout. They have pushed the deadline for an agreement out to September, but the talks remain very challenging.

The original Greek bailout was design to part-fund the country from May 2010 until May 2013. Plans for a second bailout assume the rescue effort would continue until the end of 2014.

Greek prime minister George Papandreou has said as much as €110 billion may be needed in the second intervention, the same amount as in the first.

That includes €45 billion from the first plan which has not been drawn down yet. Plans for the second rescue also include contributions from Greek privatisation and the still unsettled private creditor contribution.

The executive of the International Monetary Fund was discussing the Greek rescue yesterday and was expected late last night to agree to release its €3 billion portion of a €12 billion loan due this month under the country’s existing bailout. Euro zone ministers cleared release of their €9 billion portion a week ago.