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« Greek debt crisis deepens | Main | How I Know Another Correction Is Coming »

EU split over plan for second bailout of Greece

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THE GREEK financial crisis is stoking fresh divisions among European finance ministers as the EU authorities struggle to develop a second bailout plan for the heavily-indebted country.

As the authorities push to strike a new rescue deal at an EU summit tomorrow week, there is concern in Dublin the Greek turmoil could undermine the Government’s effort to regain entry to private debt markets next year.

Finance ministers gathered in Brussels for emergency talks last night amid a deepening rift over Greek debt restructuring between Germany and the European Central Bank. The country, already the beneficiary of a €110 billion EU-International Monetary Fund bailout, may need as much as €80 billion in a new rescue.

Ministers are discussing a German plan for a voluntary seven-year extension on the maturity of existing Greek bonds, something the ECB is resisting because it would alter debt contracts and trigger a “credit event”. Berlin wants a significant private sector contribution to reduce the call on German loans and ensure parliamentary support for a new plan, but the ECB fears any Greek default would prompt a new wave of contagion in financial markets.

With France backing the ECB, German chancellor Angela Merkel and French president Nicolas Sarkozy will attempt to reconcile their positions at a private meeting in Berlin on Friday night.

On American television yesterday on a visit to the US, Minister for Finance Michael Noonan said he did not agree with Germany.

“When we were faced with a similar situation after coming into government, we agreed with the ECB and we held back from burden sharing with senior bond holders and we didn’t proceed down that road,” Mr Noonan told CNBC. “We don’t want a credit event that has a contagion event for Ireland.”

Minister of State for Finance Brian Hayes, who represented the Government in Brussels, said the markets were not distinguishing between any of the “peripheral” euro zone countries at the moment. “We’ve got to bring to a conclusion the issues concerning Greece. Obviously Ireland has an interest in this given our own position,” he said.

“We’ve got to resolve this not only from our own perspective but from the perspective of Greece. But particularly the perspective of the euro, having stability and confidence in the euro because that’s important for Ireland.”

The ministers’ meeting broke up at about 10pm last night without any agreement. Euro zone ministers will gather for an additional round of talks in Luxembourg on Sunday night in advance of a scheduled day-long meeting on Monday.

Although German finance minister Wolfgang Schäuble said Berlin “has to insist” on private sector participation in the rescue, the ECB is resisting anything other than a voluntary initiative.

Luxembourg’s finance minister Luc Frieden said as he left Brussels last night that the issues were “difficult” and that Germany and the bank had not resolved their differences.

“It’s not only Germany and the ECB. We were listening to each other and we are moving ahead. So I’m optimistic even if I’m not sure that we find a solution next week. But within the next two weeks I think the solution should be there.”

Mr Frieden said only “limited” private sector participation which did not risk contagion was under examination.

“We have to have to be very careful that this is not considered to be a credit event. We have to be very careful that this does not lead to a rating downgrading and it’s only under these strict limitations that we can move towards private sector involvement.”

The talks come amid renewed tension in Greece, where premier George Papandreou presents an austerity plan to parliament today. His party has six-seat majority but two MPs will not vote for the plan.

It looks to us that the financial jitters are spreading........

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