French banks, among the most exposed to the Greek debt crisis, have reached an outline agreement to roll over holdings of maturing Greek bonds as part of a wider European plan to avoid sovereign default.
French President Nicolas Sarkozy confirmed the breakthrough on Monday and German bankers voiced their interest in the "French model". The news came as international bankers met euro zone policymakers in Rome to discuss how the private sector can share the burden of a second rescue program for Greece.
That meeting, which focused on the French plan and other options, ended without decisions, but an Italian Treasury official said none was expected at this stage.
Sarkozy told a Paris news conference that French banks would be offered 30-year Greek bonds with a coupon equivalent to the euro zone's lending rate to Athens, plus a premium based on Greece's future economic growth rate.
Government sources said banks had offered to reinvest 70 percent of Greek debt maturing in 2011-14. The other 30 percent would be cashed out.
Of the amount reinvested, 50 percent would go into the 30-year bonds and the remaining 20 percent would go into zero-coupon AAA bonds that could be issued or guaranteed by the euro zone rescue fund (EFSF), the sources said.
The bonds might pay about the 3 percent interest which the European Financial Stability Facility pays to borrow in the market, but interest payments would be withheld, accumulated and paid when the bonds expire, they said.
One French government source called the scheme "a sort of private Brady bond without a public guarantee", in a reference to a 1989 swap of Latin American debt for tradable securities, some of them guaranteed, proposed by then U.S. Treasury Secretary Nicholas Brady.
European Union leaders agreed last week that extra public financing to help Greece avoid bankruptcy would depend on the voluntary involvement of private sector bondholders in a way that did not cause a "credit event" and that credit ratings agencies did not brand as a selective default.
An Italian Treasury source said the Managing Director of the Institute of International Finance (IIF), Charles Dallara, met Vittorio Grilli, Director General at Italy's Treasury and chairman of the euro zone's Economic and Financial Committee (EFC) to discuss Greece's struggle to avoid default.
The source said Grilli was acting in his EFC capacity.
A participant at the talks said at least 20 international bankers first met at the offices of Intesa Sanpaolo before being taken by VIP minibuses to the Treasury for talks with Grilli. European Commission officials were also attending the meeting with Grilli, an Italian Treasury spokesman said.
A Reuters reporter saw representatives from foreign banks including Barclays at the meeting.
"Mr Dallara is participating alongside others from the public and the private sectors in meetings in Rome," an IIF spokesman said.
He said Dallara had been meeting with a range of public officials and private creditor institutions in recent days to provide informal support to help a Greek bailout.
Last week, Dallara was in Athens to discuss the debt crisis. The Greek parliament is due to hold crucial votes on Wednesday and Thursday on a new five-year austerity plan and legislation to implement structural reforms and privatizations vital for the EU and IMF to continue funding for Greece.
Decentralized
EU sources said that the talks with creditor banks were deliberately decentralized to avoid any suspicion of Europe-wide coercion.
However, Grilli was coordinating the negotiations to produce a ballpark rollover figure for euro zone finance ministers, who meet on July 3 and July 11, while the head of the euro zone's rescue fund, Klaus Regling, was talking to the ratings agencies to explore ways to avoid a default rating.
A German banking source said a call was planned on Monday between banks and the German finance ministry to discuss their contribution to a Greek bailout.
The meeting would discuss whether the French scheme could be used as a blueprint for German banks, the source said.
"The French suggestion would be a possible compromise, which on the one hand underscores the voluntariness of a maturity prolongation and should prevent triggering a credit event, while on the other hand also granting reasonable incentives so private creditors can accept it," another source close to German banks said.
"It is a very interesting model."
The head of Germany's biggest commercial bank, Deutsche Bank , which has only a tiny holding of Greek debt, warned against rushing a deal on private sector involvement.
"Political leaders expect a solution by the end of the week, but we should not rush it," Deutsche CEO Josef Ackermann told Reuters Insider in an interview. "It is important to have a good solution. The issues are complex and need to be discussed."
Ackermann, who is also chairman of the IIF, told a Reuters banking conference in Frankfurt that if contagion spread from a Greek default, the crisis could be bigger than after the collapse of Lehman Brothers in 2008.
Greece's public deficit needed to be stabilized before other options were considered, and policymakers should consider creditor banks taking equity stakes as part of a bail-in solution, he said.
However, Ackermann said it remained open whether any private sector solution acceptable to all would be found.
Germany's Private Banking Association said talks with the German government on burden-sharing in the Greek crisis were proceeding constructively.
While they were still hoping for further incentives to encourage their participation, private banks would do their bit, Michael Kemmer, managing director of the German Private Banking Association (BdB) told Reuters.