(The authors are Reuters Breakingviews columnists. The opinions expressed are their own)
By Hugo Dixon and Neil Unmack
LONDON, Jan 24 (Reuters Breakingviews) - What would a Greek Plan B look like? If brinkmanship over the so-called voluntary debt restructuring fails, Athens will be staring at a hard default. The challenge will be to prevent it being a messy one. That means bailing out Greek banks.
The difference between Athens and its private sector creditors is small. Greece’s spine has been stiffened by its official backers, the euro zone and the International Monetary Fund. It doesn’t want to pay an interest rate of more than 3.5 percent on the new bonds to be issued as part of the deal. Creditors won’t lend for less than 4 percent.
Greece’s public saviours seem ready to push things to the edge. They have reached the point of Greek bailout fatigue because of Athens’ failure to reform its economy, and they want the private sector to bear a bigger share of the burden. Now they’re also more confident they could withstand the backlash if Greece does default.
Spanish 10-year yields have fallen to 5.2 percent, Italian ones to 6.1 percent and even Irish ones to 7.6 percent. Only Portugal, with yields at 14.4 percent, remains in the same league as Greece, whose 10-year yields hover around 34 percent.
But Athens’ official creditors can’t just let the country go bust. They need a contingency plan to manage the fallout. One element could be to beef up the euro zone’s bailout funds –- as suggested by the IMF -– so it is seen to have strong enough fire walls to prevent the conflagration spreading. But the most important element would be to recapitalise Greece’s banks. The euro zone can’t afford to witness an entire country’s banking system go spectacularly bust.
The latest Greek bailout plan was supposed to pump 30 billion euros into its banks anyway. A further 30 billion euros was to be given as a cash sweetener to private creditors. In a hard default, the bank bailout might need to be increased -–perhaps by at least 10 billion euros -- but the cash sweetener wouldn’t be needed. This suggests another reason why the official creditors are hanging tough: they may save a bit of money in the process.
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-- Euro zone finance ministers on Jan. 23 rejected an offer by Greek bondholders in the latest round of debt restructuring talks.
-- At a meeting in Brussels, finance ministers said they could not accept bondholders' demands for a coupon of four percent on new, longer-dated bonds that are expected to be issued in exchange for their existing Greek holdings. Jean-Claude Juncker, chairman of the Eurogroup countries, said the interest rate on the new bonds needed to be “clearly” below 4.0 percent.
-- Banks and other creditors represented by the Institute of International Finance said a four percent coupon was the lowest rate they could accept on the new bonds. The deal would see creditors write off half the value of their debt in exchange for new bonds and cash. The deal affects 200 billion euros of privately-held bonds and is a precondition for Greece’s second bailout.
-- Greece could impose losses on bondholders if a voluntary agreement cannot be reached, Dutch Finance Minister Jan Kees de Jager said, according to reports. “Our goal is a sustainable debt. It has our preference if it's voluntary, but it's not a precondition for us.”
-- Separately, The Financial Times reported that Germany was prepared to increase the size of euro zone rescue funds to 750 billion euros, provided that euro zone countries agreed to tougher fiscal rules. The report was later denied by a government spokesman. “It is not true. There is no such decision,” Steffen Seibert, chief spokesman to German Chancellor Angela Merkel, told Reuters.
-- Reuters: Euro zone minister reject private bondholders' Greece offer [ID:nL5E8CO0PN]
-- For previous columns by the author, Reuters customers can -- For previous columns by the author, Reuters customers can click on [DIXON/]
(Editing by Pierre Briançon and David Evans)
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