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* More drastic restructuring still likely *
European banks holding billions of euros in Greek sovereign debt appear to be moving towards agreement on a rollover in which they would buy new debt to replace bonds reaching maturity.
The rollover, which would be part of a second bailout package for Greece worth around 120 billion euros, would give Athens more time to tackle its 340 bln euro ($488 bln) debt mountain — though many analysts believe a much deeper restructuring, in which creditors would have to take losses, remains likely in the long term.
Germany last week proposed a swap in which private investors would exchange their Greek government bonds for new ones, effectively extending Greek bond maturities by seven years. But banks appear to be favouring the softer option of a rollover.
"We are more and more starting to converge around a Vienna Initiative-style rollover," said Jacques Cailloux, European economist at RBS, referring to a scheme in which European banks agreed to maintain their exposure to Eastern Europe when it faced economic pressures in 2009.
Private sector participation in the new Greek bailout would be worth around 30 billion euros, euro zone official sources have said. The rest of the 120 bln euros would be provided by proceeds from sales of Greek state assets, and by additional emergency loans from the European Union and the IMF.
So far only a few banks have publicly come out in favour of a rollover, such as France's Credit Agricole , which owns Greek bank Emporiki . But Germany's banking association on Saturday said it backed the idea of private creditors participating in the rescue, though it did not specify how.
"They're going to do a rollover now it seems," said Nick Firoozye, head of regional interest rate strategy at Nomura.
INVESTORS
Private investors are currently estimated to hold some two-thirds of Greece's approximately 270 bln euros of outstanding sovereign bonds. Greek banks are believed to hold roughly 50 bln euros of the bonds, according to IFR, a Thomson Reuters news and analysis service.
Banks outside Greece are estimated to hold another 50 bln euros, with 35 bln at insurance companies and 55 bln at funds such as pension firms and mutual companies. It is not clear whether insurers and funds, in addition to banks, are being asked to take part in the proposed rollover. French and German banks have the most exposure to Greek debt, according to Bank for International Settlements data. The German government, worried about a backlash from angry taxpayers and a possible rebellion in parliament, wants to protect itself politically by having the private sector share the burden of a second bailout of Greece, which would follow a 110 bln euro rescue to which Berlin contributed last year.
European finance officials are believed to be sounding out banks about the extent to which they would be willing to participate, before a June 20 meeting of European finance ministers. Detailed negotiations with creditors might begin sometime afterwards.
To persuade enough banks to take part in a rollover, policymakers may have to provide sweeteners for the deal. One option might be to use the euro zone's sovereign baillout fund, the European Financial Stability Facility, to guarantee that banks participating in a rollover would not be alone, Cailloux at RBS suggested.
Another difficulty is the stance of the European Central Bank. Credit rating agencies have said they would probably classify a rollover as a default even if it were presented as voluntary, since it would involve an element of coercion: to some degree, bond holders would be taking part because they feared the consequences of not doing so.
The ECB, however, has insisted that it does not want any scheme that would involve a Greek default, because of the potential damage to financial markets. ECB President Jean-Claude Trichet reiterated that position on Monday.
The head of the group of euro zone finance ministers, Jean-Claude Juncker, said at the weekend that any solution would have to be agreed with the ECB.
"We cannot push this private creditor participation through without the European Central Bank, or against it," he said. Asked how such participation could be arranged and kept voluntary, he replied: "We are discussing it."
