July 10, 2010 / 3:32 PM / 10 years ago

Berlin mulls haircut plan for insolvent EMU states: report

BERLIN (Reuters) - The German government has drafted a provisional plan that would force creditors to accept a discount on sovereign debt issued by insolvent euro zone member states, a magazine reported on Saturday.

The plan to perform “haircuts” on government debt is part of Chancellor Angela Merkel’s stated intention to craft a framework for carrying out insolvency proceedings for euro states which can no longer meet their obligations.

German weekly Der Spiegel said Finance Minister Wolfgang Schaeuble had described the objective by quoting from a working document that government experts had drafted:

“Whenever a company becomes insolvent, creditors have to give up some of their claims, and this is how it should be in insolvency proceedings for states too.” A Finance Ministry spokesman said it did not want to comment on what he described as “intermediate steps.”

Germany holds the biggest European stake in a 750 billion euro (629.3 billion pounds) safety net created for the euro bloc at a time when the government is planning its own austerity measures, fuelling popular opposition to bailing out economies such as Greece.

The plan stated that the “private sector should be included in the process so that tax payers do not have to shoulder the financial burden alone,” the magazine said.

In return for agreeing to a debt haircut, creditors would have the rest of their investment guaranteed, the report said, adding that the International Monetary Fund (IMF) should be involved in the restructuring process from the start.

A new institution to be founded — dubbed the Berlin Club — that concentrated on sovereign bonds and their derivatives would act as the guarantor, the magazine said. The club should be depoliticised and independent, it added.

The Group of 20 industrial powers could make up the club’s membership, Der Spiegel said, adding that a new body founded in the euro zone was also a feasible option.

If the haircut failed to solve the problem, a second phase of complete debt restructuring would be initiated, the report said.

Were this to happen, the state in question would no longer have complete control of its finances, the magazine said.

Instead, “some person or a group of people familiar with the regional peculiarities of the debtor nation” appointed by the Berlin Club would oversee its finances.

Writing by Dave Graham; Editing by Ruth Pitchford

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