As I wrote earlier this morning, rumours of a ‘common Franco-German position’ on Greek debt
were circulating in the early hours. Details are now emerging.
Nicolas Sarkozy has dropped plans to impose a 0.0025 per cent levy on Eurozone bank assets, which was opposed by Angela Merkel for being much too cumbersome. In return, it seems that Merkel is
prepared to consider the French-led plan of bond rollover. Merkel is also keen that private sector holders of Greek bonds pay their share of this second bailout. According to the FT, she favours a bond-swap deal, whereby bonds that will mature in the
next eight years are swapped for new 30 year bonds paying a lower rate of interest.
Franco-German co-operation is obviously an important milestone on the road to securing wider agreement. But criticisms remain: these are piecemeal measures, rather than a moment of grand coherence.
There are practical problems too. The German bond-swap idea would cause Greece to selectively default. The European Central Bank is trenchantly opposed to solution that precipitates default,
fearing that default might fatally undermine the currency. The ECB has made it clear that it will not accept bonds from a defaulting nation. The problem here is that the ECB has been lending money
to impoverished Greek banks against Greek government bonds. Unless the ECB relents, it’s clear that Greek banks will have to be recapitalised in the event of default by a
pan-European fund, which might be difficult to achieve.
Considerable uncertainty remains, despite Merkel and Sarkozy’s joint front. Further solutions will have to be found and concessions made; and all the while, the gathering storms get
UPDATE: The ECB has relented and indicated that it would accept Greek selective default, which puts a different sheen on today’s events. It seems likely that the EU is prepared to
flirt with contagion.