Eurozone governments are considering a plan to prevent a Greek default under which private investors would be asked to maintain their exposure to its debt and Athens would receive a new package of EU/IMF aid, eurozone sources said.
The sources told Reuters of the new strategy on Thursday after the European Central Bank raised the stakes in its bid to prevent a restructuring of Greek debt by telling governments it would refuse to accept the bonds as collateral in the event of such a move.
The threat, made by ECB Executive Board member Juergen Stark at a conference in Athens on Wednesday came after European finance ministers raised the possibility of a "soft restructuring" via debt maturity extensions earlier this week.
One source with insight into European discussions on Greek debt said any "soft" or "hard" restructuring that might trigger a "credit event" - or the payout of default insurance contracts - was now off the table. Instead of a maturity extension, which might decrease the value of bonds and trigger such an event, banks would be encouraged to maintain their holdings of Greek debt and buy new bonds to replace issues as they matured, the source said. This would be done in combination with a new package of Greek reforms and austerity, as well as more EU/IMF money to secure Greece's funding needs through 2014.
EU Economic and Monetary Affairs Commissioner Olli Rehn has referred to the Vienna Initiative as a model for debt rollover.
The initiative was an agreement at the height of the global financial crisis between the European Central Bank, the European Bank for Reconstruction and Development, regulators and banks with subsidiaries in central and eastern Europe. Greek sovereign debt is forecast to rise to nearly 350 billion euros by the end of 2011, or 154 percent of its gross domestic product (GDP), one of the highest levels in the world. Many economists say a restructuring of the debt is inevitable, but European governments have promised not to force losses on creditors before mid-2013.
ECB officials have warned for weeks that a debt restructuring would have catastrophic consequences for the eurozone and stepped up their rhetoric this week after Eurogroup Chairman Jean-Claude Juncker suggested the bloc was open to a voluntary extension of Greek debt maturities.
"For the ECB, according to our statutory obligations, a debt restructuring would undermine the collateral adequacy of Greek government bonds," the ECB's Stark said. "This means that a debt restructuring would make the continuation of large parts of central bank liquidity provision to the banking system of Greece impossible."