The threat of a Greek default has become so real that French banks, which constitute some of the top Greek debt holders, have intensified their efforts to ease the country's floundering finances.
French lenders, along with their government, have suggested a debt rollover program, the first private-sector proposal to help save Greece.
The proposal suggests reinvesting 50% of maturing Greek debt into 30-year Greek government bonds between now and 2014. The new securities would pay a coupon close to current loans' interest rates, and offer a bonus for additional Greek gross domestic product (GDP) growth.
Another 20% of maturing Greek debt would be put into AAA-rated securities, like French Treasury bonds, as a "guarantee fund" for repayment on the 30-year debt holdings. This would take some of the Greek debt holdings off of banks' balance sheets.
French President Nicolas Sarkozy introduced the plan at a Paris news conference yesterday (Monday), saying French banks and insurance companies were committed to making it a reality.
The plan is a stark illustration of how dire the situation has become.
It's well understood that the European Union could be debilitated by a Greek default, but the United States has just as much at stake.
"The largely untold 'rest of the story' is this: If the European banking sector implodes, the U.S. financial system could take an unqualified beating," said Money Morning Contributing Editor Shah Gilani. "Big U.S. banks have been lending generously to banks across Europe. Close to 29% of their lending books during the past two years have gone to their heavyweight European counterparts. While they have pulled back considerably as a result of recent turmoil, U.S. banks are widely believed to have $41 billion of direct exposure to Greece."
This link between U.S. and European banks could lead to the next global credit crisis, according to Gilani.
But will the French plan work?
Many analysts said it's too early to tell if the plan would be a good move for the top Greek debt holders.
"The mechanics of the French plan are so daunting that I don't see how any bank can evaluate them," Carl Weinberg, chief economist of High Frequency Economics Ltd. told Bloomberg News. "Half the debt maturing over the next three years includes paper at 98 cents on the dollar and other paper at 54 cents. Do banks have a choice? If so, they would fork over the 2013s or the 2014s and hold on to the 2012s."
About $91.3 billion (64 billion euros) of Greek government bonds will come due for repayment over the next three years. Greece needs to pass proposed austerity measures this week to receive another $17.1 billion (12 billion euros) of additional bailout funds next month and meet its bond repayment obligations.
The proposal was discussed Monday at a meeting of the International Institute of Finance, where many representatives from the French and German banking and insurance industry attended. The plan will need support from fellow Eurozone governments to move forward.
Some European governments have already demanded private investors take a bigger role in resolving the Greek debt crisis, calling for them to roll over as much as $42.8 billion (30 billion euros) in Greek debt.
Germany had pushed for private-sector involvement earlier this year, but was met with strong opposition from France and the European Central Bank. The country said it will likely discuss its own plan at a Eurozone finance ministers meeting July 3 in Brussels.
"We could see more or less a French solution," one senior German banker told The Financial Times. "But 30 years is very, very long. Whether it will be 15 years or 10 years or five will be decided by the talks which have to follow."
French banks are among the most eager to avoid a Greek collapse because they have $53 billion (37.1 billion euros) in overall net exposure to Greek private and public debt, according to the Bank for International Settlements. German banks hold more sovereign debt than the French, but two of France's biggest lending institutions, Societe Generale SA (PINK: SCGLY) and Credit Agricole SA (PINK: CRARF), also have controlling stakes in Greek banks.
Moody's Investors Service earlier this month said the three largest French banks by market value, Societe Generale, Credit Agricole SA and BNP Paribas SA will be reviewed for a downgrade because of their exposure to Greek debt.
Before any bailout proposal can be seriously considered, Greek Prime Minister George Papandreou needs approval for his $111 billion (78 billion euro) of budget cuts and asset sales. The next Greek Parliament vote will be held today (Tuesday) and then followed up Thursday with a vote on how to implement the reforms. If passed, the European Union will announce the details of a new Greek bailout package at the finance ministers' meeting July 3, likely giving Greece new funds by mid-July.
The Eurozone's future still remains unclear, even though President Sarkozy said the French proposal should unite countries in the fight to save the currency.
"Each country could find it interesting and it shows we won't let Greece go and that we will defend the euro," said President Sarkozy. "It's in all our interest."
President Sarkozy said it would be "folly" for any country to exit the euro, but billionaire investor George Soros said in Vienna Monday that the Eurozone should prepare for countries to leave the group.
"There's no arrangement for any countries leaving the euro, which in current circumstances is probably inevitable," said Soros. "We are on the verge of an economic collapse which starts, let's say, in Greece, but it could easily spread. The financial system remains extremely vulnerable."
News and Related Story Links:
- Bloomberg News:
Sovereign Debt Risk Surges to Record on Greek Default Concern
- The Financial Times:
EU 'Brady bonds' plan for Greece
- The New York Times:
French Banks Ready to Help Greek Bailout
- The Wall Street Journal:
Push for Private Help for Greece
- Bloomberg News:
Soros Says a Euro Exit Mechanism Is 'Probably Inevitable' Amid Debt Crisis