Germany refuses to back down on Greece bond swap

10th June 2011

European paymaster Germany stuck to its guns in demanding that private investors contribute to a second bailout for Greece despite an ECB warning against triggering market turmoil, adds a Reuters report.

ECB president Jean Claude Trichet says this is "an enormous mistake", after reacting to a letter from the German finance minister to eurozone peers and the ECB in which he demanded that "substantial" numbers of private creditors agree to extending the maturity on Greek paper by seven years, reports the Financial Times (paywall).

German officials say that Greece can only get back on its feet through a form of debt restructuring. However, they also admit that domestic political pressure has helped make this a priority for Berlin.

Chancellor Angela Merkel's coalition of Christian Democrats and Free Democrats voted to pass a resolution calling for the involvement of private creditors in any new aid package for Greece.

Though technically a non-binding appeal to the government, says the Financial Times (paywall) officials acknowledge Ms Merkel cannot ignore these demands when EU heads of government meet to decide the details of a new Greek package on June 24.

David Scammell, head of European & UK interest rate strategies at Schroders did not  envisage any debt restructuring or maturity extension this year. He said: "Rather we suspect that the way forward will ultimately be the full socialisation of peripheral debt – in other words, a long drawn-out process of fiscal transfers from sovereigns that are still solvent (Germany)."

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