BREAKINGVIEWS-Paris, Berlin might find Greek bailout profitable

March 1, 2010

— The author is a Reuters Breakingviews columnist. The opinions expressed are his own —

By Pierre Briancon

PARIS, March 1 (Reuters Breakingviews) – Forget for a moment the headline-grabbing numbers and the political and financial drama, which supposedly includes a European Union Greek bailout worth tens of billion of euros. It now appears that the French and German governments are working on a scheme that would end up costing much less, and may be profitable, if coupled as planned with a tough Greek deficit reduction.

It goes like this. France and Germany first make sure that their own banks keep taking on Greek bonds. This will help Athens raise the 45 billion-odd euros ($61 billion) it still needs this year, about half in April and May. To nudge their private-sector banks in that direction, the two governments won’t rely only on the traditional, friendly but firm political pressure. They will also dangle financial guarantees from state-owned financial powerhouses, Germany’s KfW  and France’s Caisse des Depots (CDC).

German and French banks together hold between a quarter and a third of Greece’s 300 million euros of foreign debt, according to some estimates. They would keep their share, but the joint action would also serve as a catalyst, with other euro zone members expected to pitch in according to their economic weight.

Announcing such a plan would by itself do a lot to cool the crisis — rumours that it was in the works shrank Greek bond spreads on Monday. The use of state-owned financial institutions would bow to the letter — if not the spirit — of EU treaties prohibiting direct bailouts by member states.

For the commercial banks buying Greek debt, which are still borrowing from the European Central Bank at near-zero rates, a handsome profit could be in store. Greek yields are likely to remain higher than the cost of the guarantee. Still, the fees for writing sovereign credit insurance would provide KfW, CDC and their peers with a gain, while investors who have gone short on Greece could end up with losses.

There is one big proviso. For the scheme to be credible, the EU – read essentially Germany – still has to approve the latest, toughest Greek deficit-cutting plan in mid-March.

Context –The Greek government was preparing the announcement of new, tougher deficit measures this week to coincide with a visit to Athens of Olli Rehn, the new European commissioner for economic and monetary affairs, according to several newspaper reports.

–The German and French government are trying to coordinate a financial-guarantee system that would help Greece keep tapping markets for its financial needs, the Wall Street Journal reported on March 1.

(Editing by Edward Hadas and Erica Billingham)


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