EU divisions worsen over a second Athens bailout, writes ARTHUR BEESLEY, European Correspondent
THE STRUGGLE continues. EU finance ministers returned to Brussels last night for yet another round of emergency talks on the Greek debt crisis. Their divisions have only deepened as they confront the fundamental problems thrown up by the debacle.
In question right now is the extent to which private investors in Greek debt will have to bear costs in a looming second bailout for Athens.
This is an issue with important implications for Ireland, as any Greek default would have the potential to derail the Irish bailout by keeping Dublin shut out from private debt markets. As a result, there is deep anxiety in Government circles that the mounting instability over Greece will make it even more difficult to regain investor confidence in time for its scheduled return to the markets next year.
The current phase of the saga pits an all-powerful Germany against the risk-averse guardians of financial stability in the European Central Bank. It is a given that Dublin has little influence in this debate.
Berlin argues that private investors must take their share of the burden in a second Greek rescue, a position reinforced by deep ambivalence over bailouts in the German body politic. For chancellor Angela Merkel, this is the price of her assent to a new loan package for Athens.
For its part, the ECB is wary of anything which suggests compulsory investor participation in a new rescue. The bank fears that would trigger a “credit event” or some other form of default, leading to contagion in brittle financial markets as investors take stock of a grave new threat to their debt holdings in weakened euro countries.
That the ECB itself is a significant holder of Greek bonds is not without consequence, for it would have to absorb any losses.
The arguments have gone back and forth for weeks, as expressions such as “soft” and “hard” restructuring and debt “reprofiling” entered the expanding lexicon of the crisis.
The ECB appears willing in principle to accept an initiative in which debt holders voluntarily renew their exposure to Greek bonds as their existing debt matures.
This would be similar to the 2009 “Vienna Initiative” for central and eastern European countries, when international creditors maintained their exposure to non-euro countries which were struggling in the aftermath of the Lehman Brothers explosion in autumn 2008. The drawback, of course, is that the huge financial pressure on Greece would in normal circumstance propel investors to reduce rather than maintain their exposure to the country.
While resisting a full-blown Greek default, Germany wants to go much further than a Vienna-type arrangement. Finance minister Wolfgang Schäuble wants a “quantified and substantial contribution” from Greek private investors, something which would appear to go far beyond the purely voluntary scheme that the ECB might back.
This has triggered a massive backlash from the bank’s top rank, as central bank governors and ECB executive board members line up in opposition to Germany. In the skirmishing yesterday, the Netherlands backed Germany and Austria came close to following suit. For their part, Belgium and Spain warned against defiance of the ECB.
With little sign of progress last night, attention was already turning to a meeting in Berlin on Friday between Merkel and French president Nicolas Sarkozy. As at previous decisive moments in the debt drama, their engagements may well set the tone for the next act. This will soon be upon us as the ministers are due to meet again on Monday and EU leaders gather for a summit at the end of next week.
Thus far, France has resolutely backed the ECB. Indeed, French central bank chief Christian Noyer has been one of the most vociferous opponents of any Greek default on the ECB governing council. Whether Sarkozy leans towards Merkel or holds back will be crucial.