Greek Plan Modeled on Vienna Program May Buy Time: Euro Credit

By Boris Groendahl
May 27 (Bloomberg) -- Euro-area policy makers trying to avert a financial calamity may turn to a blueprint that arrested contagion in eastern Europe after Lehman Brothers Holdings Inc.
collapsed.
A plan, modeled on the Vienna Initiative of 2009, would involve leaning on creditors to roll over expiring bonds, buying time for Greece until its austerity program shows results or until a law takes effect in 2013 permitting sovereign-debt writedowns. The extra yield investors demand to hold Greek 10- year bonds over German bunds has climbed more than 3.85 percentage points to 13.38 percentage points since Dec. 31.
“It’s burden sharing without restructuring,” said Mark Wall, Deutsche Bank AG’s London-based chief euro-area economist.
“You’re not changing the terms of outstanding bonds, you’re not lengthening their maturities, you’re not imposing haircuts on them. The bonds will mature but new bonds will be issued. What you’re asking the creditors to do is to participate in those new issues,” he said.
Such a proposal may bridge differences among European leaders over allowing a Greek debt restructuring, a step that Luxembourg Prime Minister Jean-Claude Juncker floated this month, sparking instant opposition from central bankers. Restructuring would lead to a “horror show,” according to Bank of France Governor Christian Noyer.
European Union Economic and Monetary Commissioner Olli Rehn has said it’s worth looking at “a Vienna-type initiative of maintaining exposure of banks” to Greece’s 341 billion euros
($482 billion) of outstanding debt. About 91 billion euros comes due through the end of 2013, data compiled by Bloomberg show.
About 62 billion euros of that aren’t covered by revenue or aid, Deutsche Bank estimates.

Debt Rollovers

EU finance ministers said last week Portugal would try to “encourage private investors to maintain their overall exposures” in its 149 billion euros of debt by rolling over maturing securities into new bonds. This is different than exchanging existing bonds for new ones, something that rating companies consider a form of default.
Persuading investors to keep lending may give politicians something to show taxpayers angered by handouts to both ailing banks and nations. In Finland, voters have rewarded parties critical of bailouts and demanded that the private sector play a role in rescuing Portugal.
“Political conditions in Europe now make some form of private-sector involvement crucial to convince public opinion to help Greece further,” said Deutsche Bank’s Wall.

Raiffeisen to UniCredit

The Vienna Initiative involved the western banks who owned the biggest lenders in eastern Europe. The plan was a key plank in the International Monetary Fund-sponsored rescues of Hungary, Romania, Latvia and Serbia. Banks, including UniCredit SpA, Raiffeisen Bank International AG and Societe Generale SA, pledged to keep their units in those countries afloat by rolling over funding and providing fresh capital when needed.
The program solved a problem known as the “prisoners’
dilemma,” in which parties don’t cooperate though it’s in their best interest to do so. It achieved that by asking banks to promise one another that they were on board and by tying public funding to the collective commitment.
“We made it clear to the banks that if one of them is leaving, the others will follow and the situation would get worse for everybody,” said Austrian central bank Governor Ewald Nowotny, who helped devise the plan for eastern Europe because of Austrian banks’ large presence in the region. “If all of them would stay, the situation would remain stable.”

Euro Version

The plan, along with $108 billion of emergency loans, worked in eastern Europe. While a euro version of the Vienna Initiative would buy time for the region’s policy makers, it wouldn’t cut Greek debt, which the EU forecasts will peak at 166 percent of gross domestic product next year.
Less than half of the European Central Bank’s 23-member governing council supports a Vienna-style approach, said a person with knowledge of the matter, who declined to be identified because the discussions are private.
Eastern Europe’s problem wasn’t excessive debt. Instead, it was dependence on western capital and the possibility that it might dry up when credit markets froze following the failure of New York-based Lehman Brothers in September 2008.
“I don’t think it will solve a lot in this situation,”
said Alessandro Giansanti, a strategist at ING Bank NV in Amsterdam. “The crisis is peculiar to Greece, while in eastern Europe, you could have argued that a big part of the crisis was external.”
Juncker, who leads the group of euro-area finance ministers, said yesterday that the International Monetary Fund may not release its portion of a 12 billion-euro aid payment to Greece next month.

Juncker Statement

“There are specific IMF rules and one of those rules says the IMF can only take action when the refinancing guarantee is given over 12 months,” Juncker said at a conference in Luxembourg.
ECB Executive Board member Jose Manuel Gonzalez-Paramo said yesterday a Vienna Initiative-style agreement for Greece may be “positive.”
While the Vienna Initiative brought 15 western European banks to the table, creditors in Greece or Portugal are more numerous and diverse, with about a third of Greece’s debt held by “foreign non-banks,” a category that includes mutual, pension or sovereign wealth funds as well as insurers outside of Greece, according to estimates from analysts at Citigroup Inc.

Greek Banks

A Vienna-like deal would realistically focus on those within reach of European authorities. “We would in particular expect the Greek banks and ECB to participate in this voluntary exercise and some European banks and/or insurance companies who may feel the force of international authorities’ moral suasion more than others,” Deutsche Bank’s Wall said.
Greek banks and other Greek investors such as the pension system own about 29 percent, or 99 billion euros, of Greek debt.
European banks, including France’s BNP Paribas SA, French- Belgian Dexia SA, Germany’s Commerzbank AG and the so-called bad bank of Hypo Real Estate Holding AG, probably own about 50 billion euros between them, New York-based Citigroup said.
The single-biggest Greek bondholder is now the ECB, which Citigroup estimates holds about 50 billion euros worth of debt.
“Given all the options on the table, this is probably the one that the ECB could live with,” said Juergen Michels, chief euro-area economist at Citigroup in London.
Europe would have to convince ratings firms that the deal is indeed wholly voluntary and not a veiled default.
“Vienna-style initiatives purport to be genuinely voluntary,” said Alastair Wilson, Moody’s Investors Service’s chief credit officer for Europe, the Middle East and Africa.
“Moody’s would seek to assess, both before and after the event, whether that was in fact so. If we concluded that there was an element of compulsion, we would very likely class this as default.”