International bankers and European Union officials failed to make progress on Thursday in securing a private sector contribution to a second bailout of Greece and bond yields climbed on concern about the scheme.
The managing director of the Institute of International Finance (IIF), a group representing around 400 banks and financial organizations, met representatives from the European Central Bank, the Greek government and the euro zone in Rome to try to break a deadlock over how private creditors might voluntarily maintain their exposure to Greek sovereign debt.
It was the latest in a series of meetings among the parties in recent weeks, but there is little sign of a deal coming together. Thursday's meeting broke up after around four hours with no conclusion.
To avoid a debt default by Greece, euro zone finance ministers are trying to put together a second international bailout by mid-September. A private sector debt rollover, in which investors would buy new Greek bonds as existing ones matured, is an important part of the new rescue plan.
A source at the Italian Treasury told Reuters that Thursday's meeting discussed ideas beyond a French proposal to roll over up to 70 percent of maturing Greek debt, including the possibility of buying back government bonds.
In an emailed statement, the IIF said participants had discussed debt buy-back approaches, but did not elaborate.
In a reflection of how expectations for a breakthrough in the talks have declined, one banking source commented ahead of the meeting: The circus moves to Rome.
Yields on government bonds of indebted euro zone states rose to euro-era highs on Thursday because of concern that any scheme to have private investors pay in a rescue of Greece could be applied to the debt of other countries too. The Irish 10-year bond yield jumped more than 0.7 percentage point to 13.42 percent. The euro weakened marginally to 1.4280.
In Frankfurt, the European Central Bank raised its key interest rate for the euro zone by a further 0.25 percentage point to 1.50 percent. The hike aims to curb inflation but will also increase borrowing costs and increase pressure on banks in Greece, Ireland and Portugal, as well as other at-risk euro zone states such as Spain.
At a news conference after the interest rate decision, ECB President Jean-Claude Trichet said the bank had decided to suspend Portugal's requirement to post collateral for credit operations, a move to soften the burden on Lisbon.
Despite pressure on Spain, Madrid attracted strong demand when it sold 3 billion euros of three- and five-year bonds on Thursday, partly because of buying interest from Spanish banks which traditionally purchase their own country's debt. This suggested Madrid was not close to losing the ability to fund itself in the markets at affordable rates.
The next bailout of Greece, which follows agreement in May 2010 on 110 billion euros of emergency loans, is expected to total around 115 billion euros ($164 billion) and aim to fund Athens until late 2014, when it should return to markets.
Of the total, euro zone governments want the private sector to provide 30 billion euros via the debt rollover. Greece itself would provide a further 30 billion euros to the package by selling state assets, and the remainder would come from the EU and the International Monetary Fund.
Euro zone finance ministers will discuss the outlines of the new plan in Brussels on July 11, but no firm decisions are expected because the private sector's role remains unclear.
Partly because of the insistence of the ECB, governments and banks have been trying to put together a Greek debt rollover which would not prompt credit rating agencies to declare a default -- even a limited or selective default. But that is proving very difficult. Asked about it, Trichet said:
We say 'no' to selective default or credit event.
Dutch Finance Minister Jan Kees de Jager told a Dutchnewspaper on Thursday that the private sector's involvement had to be substantial. If that meant putting pressure on investors to take part, then so be it, he said.
I think we need to accept that a voluntary contribution is not realistic, he told Het Financielle Dagblad. If a compulsory contribution from the banks leads to a short and isolated (credit) rating event, then that is not so bad.
Asked about De Jager's comments, Trichet said it was not part of the thinking.
The position of the Governing Council (of the ECB) did not change and, to my knowledge, the position of the Eurogroup didn't change either, he said.
(With additional reporting by Frankfurt bureau, Deepa Babington in Rome, Martin Santa in Bratislava; writing by Luke Baker; Editing by Andrew Torchia/Ruth Pitchford)