"Cutting Greek debt must be voluntary" —
Greece's debt must be lowered and banks must share part of the burden, the country's prime minister George Papandreou said on Sunday, following a meeting of euro zone leaders to try to find a solution to the region's debt crisis.
"Our object today is to ease the debt burden that weighs heavily on the backs of the Greek people. This debt is onerous and must lighten for us to breathe again," Papandreou said in a statement.
In order to get there, the EU must show "willingness to find a viable solution for Greece, with the private sector sharing part of the burden, particularly banks," Papandreou said.
Meanwhile, Lucas Papademos, a senior adviser to Greek Prime Minister said restructuring Greece's debt to help the country recover must not veer far from a July rescue deal which involved a voluntary participation of private creditors.
Papademos, a former vice-president at the European Central Bank, said that using the July 21 deal as a template would be the most prudent way to tackle the debt crisis.
Imposing deeper haircuts on bondholders could render the scheme non-voluntary, posing risks to the broader euro zone, Papademos wrote in an article in Sunday's To Vima newspaper.
60% HAIRCUT NEEDED
Private investors in Greek government bonds have already offered to accept a net present value loss of 21% under a deal struck with euro zone leaders in July.
But Greece's international lenders now estimate that private creditors would have to forgive 60% of what Greece owes them to make its debt sustainable by 2020 and contain the July euro zone loan package at 109 bln euros ($151 bln).
"Right now the most effective and prudent path is to apply the agreement European leaders reached in July and strengthen it appropriately," Papademos wrote.
"Any changes to the PSI (private sector involvement) must not put at risk its voluntary character and must not lead to a credit event," he said.
Papademos warned that the consequences of a hard, non-voluntary debt restructuring and a sovereign default would not be limited to the cost of recapitalising the local banking system and supporting pension funds.
He said the effect on confidence, the banking system's liquidity and the real economy would be significant, undermining the process of fiscal stabilisation, especially if the debt restructuring sparked a credit crisis.
"If there is a non-voluntary debt restructuring and default of a euro zone country, the risk that the problems spread to banks may be broad and significant. The recent abrupt increases in the bond yields of euro zone member states send clear, warning signals," Papademos wrote.
Meetings were being held over the weekend to tackle Greece's debt and its impact on the European banking system. On Saturday, finance ministers tried to figure out how to bolster the capital of European banks to cope with any Greek default, and prevent contagion to other heavily indebted countries.
VOLUNTARY
Any solution for further reducing Greece's debt burden must be voluntary, a Greek government official said on Sunday following a meeting of EU leaders to try to find a solution to the region's debt crisis.
Private sector holders of Greek government bonds agreed in July to take a 21% write-down in the value of their holdings to reduce Greece's debt burden. But it is not sufficient and talks are now focused on a deeper write-down, possibly 50-60%, although it is unclear if that would be accepted voluntarily.
"A basic element of the decision is that it must be on a voluntary basis," to avoid a credit default and the triggering of CDS contracts, the official said on condition of anonymity.
He added that the deepest write-down possible, while still retaining voluntary participation, was the overriding aim, to spare taxpayers in other European countries.
"We need to take corrective moves to make (the package) more balanced, to the benefit of the official sector and of Greece and not to the benefit of the banks," the official said.
Greece has already received 65 bln euros under its first, 110 bln euro ($150 bln) EU/IMF bailout agreed last year. Germany alone, which is insisting that bigger losses are imposed on private bondholders, has paid about 10 bln euros of that.
But fiscal slippage and foot-dragging over privatisations and reforms have caused the country to need a second bailout, set at July at 109 bln euros, an amount that now may have to be revised upwards.
"The additional contribution of the official sector, which is subject to approval by national parliaments, should be as limited as possible and the participation of the private sector should be as generous as possible," the official said.
A debt sustainability study by international lenders showed that only losses of 50-60% for private bondholders would make Greek debt sustainable in the long term. A senior German banker close to the talks said bank negotiators had offered to take a 40% writedown.
