Bundesbank Sounds Warning EU Holding Fresh Talks on Greek Bailout

Euro zone finance ministers met on Tuesday for fresh talks on a new bailout for Greece, which was hit by another ratings downgrade on Monday. Meanwhile, the ECB signaled it won't sign up for any new funding for Greece, and Germany might get its way on involving private investors in a new rescue.
The Acropolis surrounded by scaffolding.

The Acropolis surrounded by scaffolding.

Foto: Matt Cardy/ Getty Images

Euro zone finance ministers are meeting in Brussels to discuss a second bailout for Greece, with Germany demanding that private bondholders should contribute to a rescue.

Reuters cited euro zone sources as saying that no decisions were expected at the meeting, which will lay the groundwork for further discussions among finance ministers on June 20 ahead of a European Union leaders' summit on June 23-24.

Greece suffered a further setback on Monday when the rating agency Standard & Poor's downgraded its credit rating it to CCC from B and warned that Greece was at increased risk of defaulting. Greece now has a lower credit rating than countries such as Pakistan and Ecuador. The cost of insuring Greek debt is now almost twice as much as the price of insuring Pakistani bonds.

Athens criticized the downgrade, saying it ignored the fact that talks were underway with the EU and the International Monetary Fund (IMF) aimed at finding a solution for its finances.

Averting a State Bankruptcy

"This decision overlooks actions by the government to preclude any problems in Greece's contractual obligations," the Greek finance ministry said in a statement.

The EU and IMF last year agreed a €110 billion bailout to avert a Greek state bankruptcy, and Greece agreed to tough austerity measures in return. But a second rescue package has become necessary to stave off a Greek default.

At Tuesday's meeting, euro zone finance ministers are expected to discuss German proposals that private bondholders should be involved  in a new financing package.

Germany wants private investors to be given a chance to exchange their Greek bonds for new ones that would be seven years longer in maturity. The European Central Bank is against this idea, arguing that it would cause further credit rating downgrades, which could go as deep as a "default" level.

Central Bank Official Sounds Warning

Meanwhile, the president of the Bundesbank, Jens Weidmann, said the ECB won't assume any additional risks in a second Greek bailout. He said it was up to national governments to provide further aid.

"It is essential for monetary policy that no further burdens or risks are pushed onto the euro system," Weidmann, a member of the ECB's governing council, said in a guest commentary published in the center-left daily Süddeutsche Zeitung on Tuesday. The euro system refers to the ECB and the national central banks of the 17 euro member states.

"If additional tasks and financial risks are continuously heaped upon monetary policy, this can endanger its purpose, namely securing price stability," he said.

The ECB is already heavily involved in Greece's bailout because it started buying government bonds of high-debt countries including Greece in May 2010 and has supplied the European banking system with major liquidity injections.

"Solidarity isn't a one-way street," Weidmann wrote, referring to the bailouts for Greece, Ireland and Portugal.

Withstanding a Greek Default

"If a country were to decide not to fulfill the commitments attached to the aid, the basis for aid would disappear," he wrote in remarks that can be interpreted as a warning to Greece. According to a report by the ECB, IMF and the EU Commission  , the Athens government is making slower progress than expected in its austerity program.

Weidmann said the euro could withstand a Greek default, but added that it would have far-reaching consequences. The other member states would "have to bear considerable uncertainty, risk and additional stabilization costs," he wrote.

A voluntary involvement of private bondholders such as banks, insurers and pension funds as envisaged by Germany seems increasingly likely. European Economic and Monetary Affairs Commissioner Olli Rehn said that not all EU states backed the idea.

"But we're not as far from a common solution as some believe," he told the Süddeutsche Zeitung.

cro -- with wire reports
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