Insurers and banks urged to share cost of Greek bailout

EUROPEAN governments summoned banks and insurers to urgent meetings yesterday, urging them to share the cost of a second Greek bailout with taxpayers and avoid a market meltdown.

Germany invited private creditors to a meeting to discuss their voluntary support for the debt-struck country.

Other eurozone countries, including France and the Netherlands, held similar discussions.

“Bondholders should play a substantial role in averting a Greek insolvency... we’re inviting you to a meeting to discuss all options of a concrete contribution,” a letter sent from the German Finance Ministry to private creditors said.

The rollover of a bond at the time it matures is one possibility banks could agree to, the letter said.

Separately, the French insurers’ association FFSA said its head Bernard Spitz had been invited to the finance ministry.

Eurozone governments are discussing a second bail- out package for Greece that would run from 2011 to 2014 and could amount to €120 billion, including up to €30bn from the private sector.

There is rising pressure in countries like Germany, Finland and the Netherlands for aggressive steps to force banks to share the burden of a new aid package, after taxpayers coughed up all of the money in the previous round.

The Dutch Ministry of Finance was talking with the country’s banks, insurers and pension funds about the extension of debt to Greece, a source familiar with the matter said. The source declined to give further details.

But any suggestion that governments are forcing the banks to pay could be viewed by credit rating agencies as effectively a Greek default or restructuring. That could trigger further catastrophic debt downgrades.

German Chancellor Angela Merkel last week softened her tough position on the banks in a meeting with French President Nicolas Sarkozy, and the two agreed that any private sector support should be purely voluntary.

In exchange for their support, German lenders have now demanded “additional incentives” in the form of state guarantees, and the talks will in all likelihood focus on the details of how to make this work.

“It’s a matter of semantics. What the EU finance ministers want to avoid is a mandatory rollover because of the implications that might have for Greece’s ratings,” said Simon Adamson, a senior analyst at Creditsights.

Private investors are estimated to hold some two- thirds of Greece’s approximately €270bn in sovereign bonds. Roughly €90bn of that is held by insurance companies, pension funds and investors such as hedge funds.

French and German banks are among the biggest holders of Greek debt.

Even if Greece defaulted, the impairment charges for banks might not be devastating, some analysts say. However, a Greek default would send markets into a tailspin and spark fears countries such as Spain and Italy are next in line.

Greek Prime Minister George Papandreou survived a crucial parliamentary confidence vote, making passage of controversial economic reforms more likely.

Papandreou is appealing to lawmakers to pass his package of spending cuts, tax hikes, and the sale of state assets.