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Merkel receptive to Greek Debt Write-Off Scenario

Chancellor Angela Merkel opened the possibility that Germany may ultimately accept a write-off of Greek debt, as policy makers this week attempt to engineer a buyback that’s crucial for Greece to receive more funding.

With Greece preparing to open bids today to repurchase bonds issued earlier this year, Merkel told Bild newspaper yesterday that euro leaders might consider writing off debt once the country has a budget surplus. Germany has until now ruled out such a scenario as violating European Union treaties.

“If Greece one day can rely once again on its own revenue, without having to borrow, then we’ll have to look at this situation and make an evaluation,” Merkel told Bild am Sonntag in an interview when asked about the prospect of debt forgiveness. It wouldn’t happen before 2014 or 2015, “if everything goes according to plan,” the chancellor said.

The shift on Greece’s mounting indebtedness, which triggered Europe’s debt crisis three years ago, signals a growing consensus that a Greek exit could doom the 17-member single currency. German lawmakers approved the latest package to alleviate Greece’s burden after Finance Minister Wolfgang Schaeuble said a default could foreshadow the euro’s collapse.

Merkel’s signal of openness to eventual debt forgiveness marks “the end of denial,” Carsten Brzeski, an economist for ING Groep in Brussels who, said in a phone interview. “It’s definitely a shift, but on the other hand, it’s obvious,” said Brzeski, who called an eventual debt writedown inevitable.

Last week’s agreement by European finance ministers to give Greece more time to meet its debt targets helped ease concerns over the crisis. Spanish 10-year bonds posted a third monthly gain, with yields sliding last week to 5.3 percent from 5.6 percent. The euro rose almost 2 percent in two weeks.

EU finance ministers will meet again in Brussels today as Greece starts the repurchase operation. The offer period will end Dec. 7, though could re-open for one or two days, according to Kathimerini newspaper. Euro ministers will evaluate the results of the measure on Dec. 10, it reported.

The buyback, financed from an earmarked 10 billion euros ($13 billion) from the current rescue package, lies at the center of new measures aimed at helping scale back Greece’s debt load to a level policy makers consider sustainable: 124 percent of gross domestic product by 2020, down from a projected 144 percent if policy makers hadn’t acted.

The complex repurchase measure accounts for 11 percentage points, or more than half, of that drop, according to a letter Schaeuble wrote to German lawmakers Nov. 28. Should it fail, Greece’s creditors will have to go back to the negotiating table and try something else, Schaeuble said last week.

What constitutes sustainable debt has spawned tension between the EU and the International Monetary Fund. IMF Managing Director Christine Lagarde, who has taken a harder line on the 2020 target, said the fund’s contribution to the next aid tranche will hinge on the success of the buyback.

The repurchase will target about 62 billion euros of new bonds issued as part of a swap of privately held debt earlier this year, the biggest debt restructuring in history, according to a draft troika report. Greek banks hold some 15 billion euros of those bonds, while the country’s pension funds hold 8 billion euros.

The success of the measure, considered risky because of bondholders’ reluctance to part with securities they might be able to hold to maturity, could rest with cajoling Greek banks to participate, ING’s Brzeski said. Greek Finance Minister Yannis Stournaras has called the repurchase voluntary.

Via – Bloomberg [1]

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