New Greek aid package awaits private sector buy-in (Reuters)

ROME/FRANKFURT (Reuters) – International bankers and European Union officials made no progress on Thursday in securing a private sector contribution for a second bailout of Greece and bond yields climbed on concern about the scheme.

The managing director of the Institute of International Finance (IIF), a group representing around 400 banks and financial organizations, met representatives from the European Central Bank, the Greek government and the euro zone in Rome to try to break a deadlock over how private creditors might voluntarily maintain their exposure to Greek sovereign debt.

It was the latest in a series of meetings in recent weeks, but there is little sign of the parties reaching a deal. Thursday's meeting, which explored a possible buyback of Greek debt, broke up with no conclusion.

To avoid a debt default by Greece, euro zone finance ministers are trying to put together a second international bailout by mid-September. A private sector debt rollover, in which investors would buy new Greek bonds as existing ones matured, is an important part of the new rescue plan.

Until Thursday, efforts had focused on a French proposal to roll over up to 70 percent of Greek debt maturing before the end of 2014, with a portion of that going into new 30-year Greek bonds that would be guaranteed by other AAA securities.

But attention has now shifted to the possibility of buying back Greek debt, or switching existing Greek bonds for longer-dated ones, which could trigger a default.

In a statement, the IIF said participants had discussed "debt buy-back approaches," but did not go into details.

Reflecting fading hopes for a breakthrough, one banking source commented before the meeting: "The circus moves to Rome."

Partly because of the insistence of the European Central Bank, governments and banks have been trying to put together a debt rollover that would not prompt credit rating agencies to declare a default -- even a limited or "selective default." But that is proving very difficult.

Asked about such a possibility at a news conference after the ECB raised euro zone interest rates by a quarter of a percentage point to 1.5 percent, President Jean-Claude Trichet said: "We say 'no' to selective default or credit event."

Dutch Finance Minister Jan Kees de Jager told a Dutch newspaper on Thursday that if pressure needed to be put on the private sector to ensure its involvement was substantial, then that would just have to be done, despite the implications.

"I think we need to accept that a voluntary contribution is not realistic," he told Het Financielle Dagblad. "If a compulsory contribution from the banks leads to a short and isolated (credit) rating event, then that is not so bad."

BOND YIELDS RISE

Yields on government bonds of indebted euro zone states rose to euro-era highs on Thursday because of concern that any scheme to have private investors pay in a rescue of Greece could be applied to the debt of other countries too.

Portuguese two-year bond yields rose more than a percentage point after rising by more than 4 percentage points on Wednesday following Moody's downgrade of Portuguese debt to "junk." Irish 10-year bond yield jumped more than 0.7 percentage point to 13.42 percent. The euro weakened marginally to 1.4280.

In Frankfurt, the ECB said its rate hike was aimed at curbing inflation, but the move will also increase borrowing costs and pressure on banks in Greece, Ireland and Portugal, as well as other at-risk euro zone states such as Spain.

Trichet said the bank had decided to suspend Portugal's requirement to post collateral for credit operations, a move to soften the burden on Lisbon.

Despite pressure on Spain, Madrid showed it could still fund itself in the markets at affordable rates, attracting strong demand on Thursday for 3 billion euros of three- and five-year bonds, helped by Spanish banks which traditionally purchase their own country's debt.

BAILOUT

The next bailout of Greece, which follows agreement in May 2010 on 110 billion euros of emergency loans, is expected to total around 115 billion euros ($164 billion) and aim to fund Athens until late 2014, when it should return to markets.

Of the total, euro zone governments want the private sector to provide 30 billion euros via the debt rollover. Greece itself would provide a further 30 billion euros to the package by selling state assets, and the remainder would come from the EU and the International Monetary Fund.

Euro zone finance ministers will discuss the outlines of the new plan in Brussels on July 11, but no firm decisions are expected because the private sector's role remains unclear.

In Berlin, Jean-Claude Juncker, the chairman of the 17-member Eurogroup, added his voice to criticism by EU leaders of ratings agencies following Moody's downgrade, saying he favored the creation of a European credit ratings body.

Michel Barnier, the European commissioner for financial regulation, has suggested the licenses of ratings agencies operating in Europe could be revoked if they don't adhere to new, stricter EU rules on their operations.

(With additional reporting by Frankfurt bureau, DeepaBabington in Rome, Martin Santa in Bratislava; writing by LukeBaker; Editing by Andrew Torchia/Ruth Pitchford)

European banks meeting on second Greek bailout (AP)

PARIS – The biggest banks in the eurozone met Wednesday to hash out ways to contribute to any new financial rescue package for Greece, as trouble in Portugal revived worries about Europe's financial health and hit stock markets in Spain and Italy.

The meeting of senior executives from top European banks in Paris ended with no public announcement of a deal, but plans for further discussions in the weeks ahead.

European governments are trying to seal a new bailout package for Greece by September to help the government pay its bills and avoid a default whose effects could ripple worldwide.

Even before a new package is in place, concerns about Greece could cause investors to pull money out of other vulnerable eurozone states, such as already bailed-out Portugal and Ireland as well as much larger Spain and Italy.

Portugal's financial plight deepened Wednesday as the interest it pays on loans jumped higher and its stock market slumped, a day after its government bonds were downgraded to junk status. Stocks fell all round Europe, but especially in Spain and Italy too.

The bankers' private talks in Paris, under the auspices of the Institute of International Finance, ended in the early afternoon, spokesman Frank Vogl said, without revealing what if anything was decided.

"This was seen as part of a series of meetings and there will of course be further meetings," he said.

The bankers' main task is to come up with terms under which they would be prepared to buy up new Greek bonds, currently seen as one of the riskiest investments in the world.

The IIF said in a statement last week that the bankers would discuss a voluntary rollover of Greek bonds, and that the goal is to provide "significant cash-flow support to Greece during 2012-14 on the basis of broad-based voluntary participation by private investors."

Eurozone governments want substantial private-sector contributions to a new rescue deal for Greece, so the whole burden doesn't fall on taxpayers, many of whom are angry at having to bail out a country long seen as sloppy with its finances.

German Finance Minister Wolfgang Schaeuble insisted Wednesday that the private sector will have to play a central role in the new Greek aid package and noted that Europe's biggest economy was prepared to work on the basis of a recent proposal from French banks.

Under the French proposal, banks would reinvest 50 percent of their holdings in new Greek bonds with a maturity of up to 30 years and being secured by a separate safety fund.

Schaeuble added that "there are also a lot of arguments for alternatives, and we will have to discuss that calmly but thoroughly by September." He didn't elaborate.

France's new Finance Minister Francois Baroin said Wednesday that a plan worth somewhere in the region of euro100 billion ($144.6 billion) should be ready for September.

Baroin said he will go to Berlin on Thursday for talks with Schaeuble.

The European Commission has said that Greece will need an extra euro115 billion ($166 billion) through the middle of 2014, on top of the euro110 billion ($159 billion) from European governments and the International Monetary Fund granted a year ago — although some of that financing will come from the sale of public assets and the private-sector contribution.

Eurozone governments are keen to make sure that any rollover of Greek debt by the banks is not considered a default by credit rating agencies. No eurozone country has ever been considered to be in default of its debt, and the European Central bank fears that such a negative rating could undermine investor confidence in banks throughout the currency union.

Though last week's decision by the Greek Parliament to back further austerity measures in return for crucial bailout funds has helped calm jitters in the markets, Europe's debt crisis is likely to remain a major concern for investors.

The decision by Moody's to downgrade Portugal to junk status late Tuesday weighed on European stocks and the euro Wednesday. The agency said the country will find it difficult to meet its targets and that it too may need a second bailout.

In Greece, strike action remains a major obstacle to the government's program. On Wednesday, taxis across Greece are holding a 24-hour strike to protest the opening of their profession to more competition.

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Geir Moulson in Berlin and Gabriele Steinhauser in Brussels contributed to this report.

Greek deputies to debate austerity plan (AP)

ATHENS, Greece – Greek lawmakers begin debating new austerity plans Monday that must pass this week if the debt-ridden country is to receive the critical next installment of loans from its international bailout plan and avoid default.

The deeply unpopular spending cuts and tax hikes in a midterm austerity bill and an additional implementation law are expected to be voted on in parliament on Wednesday and Thursday. They must be passed for the European Union and International Monetary Fund to release the next euro12 billion batch of loans from the euro110 billion bailout.

Without those funds, Greece runs out of money in mid-July and faces becoming the first eurozone country to default on its debts — a potentially disastrous event that could drag down European banks and affect other financially troubled European countries.

"The euro12 billion of this fifth installment is absolutely essential to service the cash needs of the public sector, which is in reality the servicing of citizens' immediate and vital needs," Finance Minister Evangelos Venizelos said over the weekend.

Prime Minister George Papandreou's Socialist party has a five-seat majority in the 300-member parliament, so should be able to pass the bills. However, Papandreou has faced an internal party rebellion over the measures, and at least two deputies have said they are considering not voting in favor.

Venizelos was meeting with the deputies in an effort to find a solution. He was also discussing with international creditors how to plug a euro600 million shortfall in this year's budget, which could see extra measures included in the bills.

The rebellion peaked in a political crisis earlier this month that almost led to a government collapse as Socialist deputies began resigning their parliamentary seats and cross-party talks to create a coalition government with the conservative opposition collapsed. Papandreou faced down the revolt and bought time with a broad cabinet reshuffle in which he replaced his finance minister.

The main opposition Conservative party leader, Antonis Samaras, has withstood intense pressure from European officials to lend his backing to the bills. While he supports certain cost-cutting measures and privatizations, he says the overall thinking behind the euro28 billion midterm austerity bill is flawed and he will vote against it.

The new austerity plan runs two years beyond the current government's mandate to 2015 and will see increases to consumer and heating fuel taxes and a drop in the minimum limit for income tax, to euro8,000 a year from euro12,000.

The measures have already sparked widespread protests. Workers are to hold a 48-hour general strike on Tuesday and Wednesday, while groups of protesters who have been camped out in the capital's main Syntagma Square have vowed to encircle the parliament building on Wednesday to prevent lawmakers from entering the building and voting on the austerity bill.

"I know very well that the measures in the midterm fiscal program and the implementation law are heavy and in many parts unfair," Venizelos said, but added they were essential if Greece is to continue receiving its rescue funds.

Ahead of the general strike, a communist party-backed union, PAME, held a protest at Greece's most famous ancient site, the Acropolis, hanging banners in English and Greek over the monument's walls reading: "The peoples have the power and never surrender. Organize counterattack."

"It's a symbolic act by PAME," said activist Giorgos Peros. "We want to show to all the people of Europe and Greece that people don't surrender to the desires of the monopolies, multinational corporations, big capital, the government, the IMF and the EU."

Under Greece's original bailout, from which it began receiving funds in May last year, Greece had been expected to be able to return to borrowing on the international bond market next year. But persistently high interest rates demanded for its bonds have essentially locked it out of that market, and it has become clear the country will need more help.

European leaders are currently discussing a second bailout, which Papandreou has said will be roughly the same size as the first one, and which could include the voluntary participation of private banks which would agree to roll over Greek bonds they hold.

French banks ready for big Greek debt rollover (AP)

PARIS – French banks are ready to help troubled Greece by accepting a significant debt rollover, President Nicolas Sarkozy said Monday, a move that could push other banks to pitch in to the Europe-wide effort to keep Athens from defaulting.

Sarkozy said the plan would see banks reinvest their Greek debt holdings into new bonds over 30 years. That would give Greece valuable funding to manage its huge debt load and buy it time to reform its economy.

French banks are among the biggest holders of Greek sovereign debt — some euro15 billion ($21 billion)_ with Germany's financial sector also heavily exposed, to the tune of euro22.7 billion.

Sarkozy urged others to follow the example of the French plan, which was presented Monday at an international meeting in Rome where banks and financial institutions discussed what the private sector can do to save Greece from default.

The closed-door meeting was organized by the International Institute of Finance and the director-general of the Italian Treasury Ministry, Vittorio Grilli, in his role as president of the eurozone economic financial committee. It ended without a statement.

The LaPresse news agency, without disclosing its sources, said there was "consensus" on renegotiating Greek debt along the lines suggested by French President Nicolas Sarkozy.

A spokesperson for the Treasury Ministry, speaking on the usual ground rule of anonymity, said "no decisions, either formal or informal, were taken. It was just an exchange of views today."

A report in Le Figaro newspaper says that the banks are ready to re-invest, or roll over, up to 70 percent of the Greek sovereign debt they hold. Asked whether the report was correct, Sarkozy said "yes."

"It's a system that other countries could find useful," he said of the plan.

"The idea is that we won't let Greece fall, we will defend the euro, it's in the interest of us all," he told a news conference.

The proposed plan would have the benefit for banks of avoiding a complete rollover of their Greek debt, which is another idea that has been mooted in Brussels in recent days.

According to Le Figaro, half of banks' Greek government debt would be reinvested in new securities with a much longer maturity of 30 years. Another 20 percent would be invested in a "zero coupon" bond, the interest on which would be re-invested in high quality government bonds to provide participating banks a guarantee for their Greek investment.

That would alleviate another stumbling block to finding a Greek solution — Germany's resistance to giving private creditors a European guarantee for their loans to Greece.

A Greek default would have grave consequences on all 17 countries that use the euro and rock markets worldwide. European leaders are trying to get the private sector to take part in a new rescue package under discussion for Greece.

Germany has a greater amount of Greek government debt than France. But France has a larger total amount of Greek debt because of its exposure to Greek private banks, mainly Credit Agricole's ownership of Emporiki Bank.

The finance ministry in Germany, which has pushed hard for private creditors to contribute, said it welcomes proposals from the private sector, as in the French case.

The German government "is still in talks with financial institutes, with banks and insurers, with major private creditors, for example investment funds," ministry spokesman Martin Kreienbaum said. He did not give details.

European countries and the International Monetary Fund put together an original bailout last year for Greece. But persistently high interest rates demanded for its bonds have meant the country needs more help.

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Cecile Brisson in Paris, Geir Moulson in Berlin and Victor Simpson in Rome contributed to this report.

Sarkozy says banks accept Greek debt rollover (Reuters)

ATHENS/PARIS (Reuters) – French banks have agreed to roll over holdings of Greek debt for 30 years, President Nicolas Sarkozy said on Monday, as the Greek government fought to persuade backbench rebels to back a crucial austerity plan to avert bankruptcy.

With financial markets watching the Greek crisis anxiously, Sarkozy told a news conference in Paris that the French authorities had reached an agreement with the banks 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.

Banking sources confirmed that was part of an outline deal under which banks would reinvest 70 percent of the proceeds when Greek bonds fall due. Of that amount, 50 percent would go into the new 30-year bonds and 20 percent would be reinvested in a zero-coupon guaranteed fund based on high-quality securities.

European Union officials were discussing the French idea with international bankers and the Institute of International Finance (IIF) in Rome on Monday, euro zone sources said, and German banks voiced interest in the "French model.

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 privatizations.

Greek Finance Minister Evangelos Venizelos met ruling socialist party (PASOK) rebels in Athens 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.

Without parliamentary approval for the measures, which have caused a wave of strikes and demonstrations, the European Union and International Monetary Fund say they will not release the fifth tranche of the 110 billion-euro bailout agreed last year.

If the 12 billion-euro tranche is not forthcoming, the Greek government, which has been shut out of financial markets because of the ruined state of its public finances, will run out of money within weeks, probably triggering a Europe-wide crisis.

PREPARATIONS

Venizelos was due to meet wavering deputies throughout Monday in a last-ditch bid to ensure the votes pass after German ministers warned that Europe had to make plans for the event of a defeat which would block the next tranche of aid.

"(Rejection) isn't Plan A, or the most likely outcome but the euro zone and its financial sectors need to make preparations," Deputy Finance Minister Joerg Asmussen told a conference on Monday.

In a sign of growing nervousness on financial markets, the premium investors demand to hold Greek debt rather than benchmark German bonds widened by 20 basis points on Monday to 1,432 basis points.

The debate in parliament is due to begin on Monday evening with an initial vote on the framework austerity package due on Wednesday, and lawmakers then voting on Thursday on a separate bill containing specific steps to implement it.

Defections over the past 13 months have cut Papandreou's support in the 300-member parliament to 155 seats, meaning a handful of votes could decide the issue, which may be further complicated if one bill passes and the other does not.

In an interview with Spanish daily El Mundo on Sunday, Deputy Prime Minister Theodore Pangalos said he believed the first vote would pass but he was less confident about the second implementation bill.

"That's where we may have problems," he said. "I don't know whether some of our legislators will vote against it."

BAILOUT INSUFFICIENT

With the current 110 billion bailout insufficient to keep Greece going, European leaders are working on a further package of a similar size including a contribution from private banks which would agree to a "voluntary" rollover of their Greek debt.

Whether such a deal will be enough to stave off problems in the longer term remains uncertain. Many investors and economists believe that even if the austerity package is passed this week, it will merely delay an inevitable restructuring or default.

With the fate of both the existing aid plan and the new package dependent on this week's vote, major rallies are planned by the protestors who have been occupying Syntagma Square outside the Greek parliament in Athens for the past month.

Public anger has been fueled by Greece's worst recession since the 1970s, a youth unemployment rate of more than 40 percent and public finances that have been shattered by a debt equivalent to some 150 percent of gross domestic product.

The powerful public sector union ADEDY and its private sector equivalent GSEE are due to hold a 48-hour strike on June 28 and 29, that will hit public transport, telecoms, the post office and many hospitals.

Many companies, including the main electricity group PPC which is slated for partial privatization next year, have already started rolling stoppages.

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

(Writing by James Mackenzie, editing by Paul Taylor)