Amid growing fears over a possible sovereign default, Germany and France are understood to be finalising a plan that will see state-owned banks buy Greek gilts.
German government-owned KfW and French government-owned Caisse des Depots are expected to purchase around half a €30bn bond issue, with the other half going to private euro debt investors.
In exchange the Greek government has agreed to strengthen spending cuts and tax increases to €4bn. The tighter measures will be revealed on Wednesday after EU economic commissioner Olli Rehn’s visit today.
French finance minister Christine Lagarde told a radio station yesterday: “I have no doubts that Greece will succeed in refinancing itself through ways that we are exploring at the moment. It would involve private partners or public partners or both.”
A concrete solution to Greece’s woes would remove a burden from European banking stocks and the euro, which have been laden down by market worries. A default by a Eurozone country would cause huge losses for banks and destabilise weaker members like Spain and Portugal.
Athens needs to service €22bn of debt in April and May and raise €30bn in new borrowings. A smaller issue of up to €5bn in 10-year bonds was delayed last week, but is on track to be announced in the coming week.
Threats of a downgrade by credit ratings agencies Moody’s and Standard & Poor’s, together with the poor performance of Greece’s last bond, will make it difficult to issue debt through normal channels.
Greece has shocked its neighbours with a public deficit of 12.7 per cent of GDP, four times the EU limit. On Friday, the government was thrashing out a scheme to reduce the deficit to 9 per cent of GDP or below by the end of the year.
Prime Minister George Papandreou told the Greek parliament: “We must do whatever we can now to address the immediate dangers today... Tomorrow it will be too late.”