A split has opened in the eurozone over the terms of Greece's second €109bn bail-out with as many as seven of the bloc's 17 members arguing for private creditors to swallow a bigger writedown on their Greek bond holdings, according to senior European officials.
The divisions have emerged amid mounting concerns that Athens' funding needs are much bigger than estimated just two months ago. They threaten to unpick a painfully negotiated deal reached with private sector bond holders in July.
While hardliners in Germany and the Netherlands are leading the calls for more losses to be imposed on the private sector, France and the European Central Bank are fiercely resisting any such move. They fear re-opening the bond deal could spark renewed selling of shares in European banks, which have significant holdings of Greek and other peripheral eurozone debt.
Shares in French banks have rallied in recent days following signs that eurozone officials are preparing to increase the financial firepower of the bloc's €440bn bail-out fund, which could within months be able to inject capital into eurozone banks and purchase sovereign bonds.
Greece makes effort to control debt
On a visit to Berlin, George Papandreou, the Greek prime minister, urged Germans to recognise the "superhuman effort" his country was making to impose drastic austerity measures in a deepening recession. "I can guarantee that Greece will live up to all its commitments," he said.
Can Germany help save Greece?
Senior European said there was significant division over the move to re-open the bondholders' deal, which could trigger a bigger and earlier restructuring of Greek debt. Even within Germany, officials are split over whether to press for a bigger "haircut" for private sector creditors.
"In Germany, there are the hardliners and there are the moderates," said one senior European official. "This is the hardliners' stance."
Will the euro survive?
Because of the recent economic downturn and Greece's slow implementation of austerity measures, officials estimate Athens' funding needs over the next three years have grown beyond the €172bn forecast this summer. The scale of the shortfall will be determined by international lenders over the next few weeks.
Berlin has long wanted bondholders to make a bigger contribution to a new bail-out, a point reiterated publicly in recent days by Wolfgang Schäuble, Germany's finance minister.
German insistence has recently intensified, according to people briefed on the talks. Eurozone finance ministers had originally hoped to sign off on the next aid tranche to Greece on Monday, but a decision is now expected to delay the next €8bn payment until an emergency meeting in two weeks.
Berlin is expected to back the disbursement eventually. But a senior official said some German policymakers then want the banks to take a larger haircut on their bond holdings or renegotiate bond swaps, reflecting the sharp fall in Greek bond values since July.
Under the terms of the July bail-out, bondholders agreed to trade about €135bn in bonds that come due through 2020 for new, European Union-backed bonds that would not be repaid for decades. This deal implied a haircut of 21 per cent for bondholders, but many German officials say they were forced to agree a deal that was too beneficial for the banks.
On Tuesday, eurozone banks and German and French stock markets had their biggest gains since the first Greek bail-out was unveiled in May 2010.
France's Société Générale surged 17 per cent, BNP Paribas was up 14 per cent and Crédit Agricole gained 13 per cent while the broader eurozone bank sector increased 9 per cent. BNP and SocGen shares have now risen by a third in the past three days.
Source financial Times