Germany has put a Greek bond swap back on the table as a model for private sector involvement in fresh aid for Athens, Deputy Finance Minister Joerg Asmussen told Reuters Insider TV on Wednesday.
"The model put forward by some French banks is still a good base for discussions and we are currently working on this," Asmussen said in the interview, referring to a French proposal to roll over Greek debt.
"But since rating agencies have signalled that they will consider modalities (such as) the French proposal as a selective default — that means a rating event — we can also put other options like a bond exchange on the table," he said, adding discussions would take place over the summer break.
Finance Minister Wolfgang Schaeuble wrote to his euro zone colleagues, the European Central Bank and IMF last month demanding that banks holding Greek bonds swap their bonds for new ones with maturities seven years longer.
But rating agencies signalled then that such a step would be akin to a rating event and the ECB, European Commission and France pushed for a softer solution involving a voluntary debt rollover, prompting Germany not to insist on its bond swap idea.
FRENCH INCENTIVES "TOO CLEAR"
Asmussen said the French model may set "too clear" incentives for private creditors to participate.
"The model certainly has advantages in the sense that it gives clear incentives for financial market participants to contribute voluntarily. But the question is: are the incentives maybe too generous?" he said.
Work was being done to modify the proposal, especially with a view to lowering the interest rate Greece would pay on its debt, but other options including the bond swap would also be considered.
"First, one has to look how can one modify the French proposal in a way that it is still attractive to financial institutions," Asmussen said.
"But one element one needs to look at is the interest rate that Greece has to pay because the higher the interest rate, the more negative it is for the debt sustainability situation of the country," he added.
Germany's revival of the discussion on a bond swap could pit Berlin against other European governments that have argued instead for a rollover that would give private creditors greater incentives to participate.
German Chancellor Angela Merkel said on Tuesday that Greece's international lenders should not lose the ability to make their own judgements in the face of rating agency warnings.
Germany's financial sector agreed in principle last week to contribute to a fresh Greek rescue. Since then, Standard & Poor's dealt a blow to the French bank model by warning it would treat the plan as a default.
If a "rating event" — a debt downgrade to selective default — is not avoidable, it should be limited to a short period of time, Asmussen said.
He added that while the volume of outstanding Greek credit default swaps (CDS) was limited — at around 4-5 bln euros — it still bore a systemic risk.
