Secret EU talks on debt restructuring.

The report in Saturday’s Irish Times by Arthur Beesley that EU finance ministers begin talks on restructuring Greek sovereign debt has huge implications for Ireland’s future. It is clear that restructuring will be an issue in the Euro periphery over the next few years.

The Irish Times – Friday, January 21, 2011

EU finance ministers begin talks on restructuring Greek sovereign debt

EU FINANCE ministers have opened tentative talks on the restructuring of Greek sovereign debt, a discussion with potential to lead to a restructuring of Irish debt.

A euro zone source said the ministers were discussing whether the euro zone rescue fund should be empowered to extend credit to Greece so the country could buy its bonds from secondary markets at a discount to their nominal price.

The source said such a measure has been raised by the EU’s economic and financial committee – on which European Commission and euro zone finance ministry officials sit – and was discussed when euro zone finance ministers met last Monday night and when the wider group of EU finance ministers met on Tuesday.

A Government spokeswoman declined to comment last night on German media reports that the question of Irish restructuring is already on the table. According to the euro zone source, the ministers did not examine Irish restructuring during their talks this week.

Still, the rationale offered for any Greek restructuring could set a precedent to restructure Irish debt if Ireland remained shut out from private debt markets near the end of its EU-IMF programme.

The euro zone source said the talks took place due to concern that Greece may be unable to gain enough investor confidence to execute a smooth return to private debt markets as its rescue plan is unwound. The objective of the European authorities, said the source, was to ensure there would be no repeat of the market turmoil which was triggered last year by the Greek crisis.

Such talks are highly sensitive, as the European authorities have resisted debt restructuring due to concerns that moves in that direction will lead to further disruption on markets. The possibility of senior bondholders in Irish banks being compelled to take a haircut on their receivables was ruled out from Ireland’s EU-IMF bailout when markets reacted badly to reports that such a move was under discussion.

Given the likelihood of an adverse market reaction, one key question to be resolved was whether the existence of any restructuring procedure should be publicly declared at all.

As the debate proceeds, major European governments will have to weigh the possibility that they might have to recapitalise banks that incur significant losses on their holdings of Greek debt and that of other weaker countries.

It takes place as euro zone governments discuss how they might widen the scope and scale of the European Financial Stability Facility (EFSF), as their temporary bailout fund is known, and seek final agreement on a mandate for a new permanent fund. They have already agreed that the permanent fund will include provisions to compel private investors to bear losses on new sovereign debt issued after 2013.

The discussions about Greek debt were denied yesterday by Greece and Germany, whose support would be crucial if the initiative is to take flight. They have also been denied by the commission. “This is nonsense,” said the spokesman for economics commissioner Olli Rehn.

However, diplomatic and other sources said that several options were under discussion as the EU authorities seek agreement on a comprehensive package of measures to assert control over the debt crisis.

The disruption wrought by the Greek debacle continues to undermine markets and acute investor scepticism about the prospects of weakened euro zone members was the prime factor in Ireland’s decision to seek EU-IMF aid. The same forces are at work in current pressures on Portugal and other countries such as Spain.