Greece: Private-sector voluntary aid may be impossible
Following last week's agreement between Angela Merkel and Nicolas Sarkozy that any private-sector contribution to Greece's rescue would be voluntary, not a compulsory roll-over of credit or formal write-down of the 340bn euros owed by the Greek government, there has been understandable interest in what on earth the eurozone has in mind.
These uncertainties came to a head late on Sunday night, in a conference call between the leaders of the G7 developed economies - whose main point was to brief the US and the Canadians about attempts to stabilise and quarantine the Greek financial problem.
Because US banks have the second biggest exposure of any country's banks to the Greek economy (see my note "Eurozone woes are US woes"), Tim Geithner, the US Treasury secretary, was particularly interested in learning what France and Germany mean by "voluntary" contributions.
The response he received, according to a well-placed source, was profoundly unenlightening, I am told. "It is all incredibly vague and formless" said a source. "Goodness only knows how they will get a serious and credible proposal together by the deadline they've set themselves of July".
The idea seems simple enough. As and when Greek government bonds owned by banks, pension funds, hedge funds, insurers and (presumably) the European Central Bank, among other things, mature and come up for repayment, those banks, pension funds and so on would choose to lend the repaid debt back to Greece - thus reducing the amount of money that eurozone governments and the International Monetary Fund would have to lend to Greece to prevent it reneging on its debts.
The hope would be that, in this way, additional loans from eurozone taxpayers to Greece could be reduced by (perhaps) 30bn euros.
Which is a brilliant wheeze, modelled on the so-called Vienna agreement with banks which kept the economies of eastern Europe afloat in 2008. Except for one thing: the relevant eastern European economies back then were not nearly as indebted as Greece is today.
They had a relatively short term liquidity or cash-flow problem. Greece's woes are much more fundamental.
The point is that eastern European banks and governments had become too reliant on wholesale finance that dried up in the credit crunch. But they were not conspicuously insolvent. Which meant that international banks could roll over credit to them and be reasonably confident they would get their money back.
That is glaringly not the case for Greece. If you can find me a banker who - hand on heart - doesn't think Greece is bust, insolvent, then I will point you to several thousand who take the opposite view.
It is simply taken as fact everywhere but the conclave of eurozone finance ministers that Greece has borrowed perhaps twice what it can afford.
There is therefore no banker, or pension fund manager or insurance executive anywhere in the world who - left to his or her own devices - would willingly lend more money to Greece.
That's not a guess. It is a demonstrable fact, based on Greece's inability to pay its bills for the past year without access to a 110bn euro facility provided by eurozone members and the International Monetary Fund.
So against that backdrop, for any banker who is lucky enough to have his or her loan to Greece repaid by the eurozone and IMF in the coming weeks and months, would it be remotely rational for that banker to re-lend that money to Greece?
Would it be rational to receive back 100m euros for example, and then hand it back to Greece knowing it's pretty likely that - at some point - around half of that 100m euros will be written off.
Wouldn't that be the financial equivalent of narrowly avoiding driving over a cliff, only to do a Thelma and Louise, put the pedal to the metal and drive over the edge?
Here's the thing. The only reason for the eurozone finance ministers to look for "voluntary" participation of the private sector in a new Greek bailout - as opposed to compelled participation - is to avoid an action that could be seen as a formal default or forced reduction in the value of Greece's debt.
As the German finance minister, Wolfgang Schaeuble, said last night, he and his eurozone peers are desperate to avoid a "credit event" (although he has changed his tune in the past few days - since it was Schaeuble who had been pressing for a more compulsory form of private-sector help).
Such a credit event or default would force banks to write down the value of the Greek sovereign debt they hold in their banking books (as opposed to their trading accounts), which would destroy the solvency of Greek banks and foist big losses on French, German, and US banks.
There would also be serious contagion to the value of Irish and Portuguese state and banking debt. The price of Spanish and Italian sovereign debt would fall too. And there would be serious questions about the viability of the European Central Bank - which is the biggest holder of all this stuff - in the absence of a huge recapitalisation (see my note from yesterday for more on all this).
But ponder for a second. Let's say that all French banks, which collectively have the biggest exposure to Greece, decide to re-lend to the Greek government the proceeds of any maturing Greek bonds.
Against the backdrop of visible political pressure for them to do just that, could the auditors to those banks genuinely be confident that there was no element of duress in a decision which looks like commercial madness?
If they asked the chief executives of said banks why they were rolling over those loans, the reply might well be that in doing so there would be a greater prospect of recovering money from residual exposure to Greece. But such a reply would be to admit that any credit extended to Greece is at serious risk of loss.
So voluntary private-sector participation in a Greek bailout might not be called a formal debt restructuring, but that's what it would look like. And wouldn't auditors - and credit rating agencies - in those circumstances feel under enormous pressure to declare all lending to the Greek government as significantly impaired? Wouldn't the credit event, that Schaeuble and his chums are so desperate to avoid, be triggered?
Or to put it another way, a voluntary private-sector contribution to Greece's rescue may be a beautiful creature, a unicorn of financial succour. But it may be as real as a unicorn.
Which leads to a difficult conclusion for eurozone ministers: they've either got to accept the case for a formal, orderly default by Greece (which they are not minded to do); or eurozone taxpayers are probably going to have to stump up even more money to keep Greece afloat (for the time being, at least).