Germany signals compromise and odds for a new Greek rescue package improve

06/17/2011 1:39 pm EST


Jim Jubak

Founder and Editor,

German Chancellor Angela Merkel seems to have blinked. In a joint press conference with French President Nicolas Sarkozy in Berlin today she indicated that Germany would accept a deal on a new Greek rescue package along the lines of the 2009 Vienna Initiative. “We would like to have a participation of private creditors on a voluntary basis,” Merkel said. “The aim is involvement of the private sector on a voluntary basis, and for that the Vienna Initiative, as it’s called, is a good basis”

“Voluntary” is the key change. Germany has been pressing to require bondholders to participate in a “soft restructuring” of Greek debt that would mandate extending the maturities of existing Greek government bonds. The European Central Bank has opposed requiring bondholders to participate and has argued that debt-rating companies such as Standard & Poor’s would regard a mandatory extension of maturities as a default. Even a technical default, the bank has said, would cut Greek banks off from financing since the European Central Bank would not lend the country’s banks money with Greek government debt as collateral in the event of a default.

The German flexibility doesn’t guarantee a deal but it opens new space in negotiations that have seemed bogged down recently. Eurozone finance ministers meet on June 19-20 with a European Union summit following on June 23-24. A possible deadline for achieving a deal is the July 11 meeting of the finance ministers.

Bond and stock markets rallied on the press conference. Greek two-year notes climbed in price driving the yield down 1.7 percentage points to 28% as of 3:30 p.m. in London. (Yes, 28% is an improvement when yields have been near 30%.) The euro was up 0.86% against the U.S. dollar as of noon New York time. The CAC index was up 0.83% in Paris and the German DAX index was up 0.76%.

Financial markets aren’t out of the woods yet—but the forest is getting a little thinner.

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