EURO ZONE finance ministers are considering a fundamental revision of their strategy in the Greek debt crisis, a move which comes amid an escalation of market pressure on Italy over its high debt.
At issue as the ministers meet today in Brussels is whether they agree to look again at a German debt-swap plan in which Greek investors would be urged to exchange their bonds for debt with a longer maturity.
This plan was scrapped weeks ago on the basis that it would lead to a default rating on Greek debt, something which is resolutely opposed by the European Central Bank.
The latest rethink was prompted by a warning from rating agents that an alternative French plan, perceived to be softer on investors than the German proposal, would lead to a default rating.
The uncertainty of the outlook for Greece has fuelled weeks of turmoil on financial markets, raising questions over the viability of the Government’s plan to re-enter bond markets next year.
However, a spike in Italian borrowing costs last week has prompted a new sense of urgency in the talks.
European Council president Herman Van Rompuy has called top EU officials to a special meeting in Brussels this morning before finance ministers gather in the city.
While Mr Van Rompuy meets EU Commission chief Jose Manuel Barroso for breakfast on Mondays, they will be joined today by European Central Bank chief Jean-Claude Trichet, economics commissioner Olli Rehn and Jean-Claude Juncker, who presides over meetings of the euro zone ministers.
Talks on the German plan are not yet well advanced. However, any decision to proceed down that road would mark a significant shift in the ministers’ strategy on Greece.
Until now they have always steered clear of anything which raised the prospect of a default rating.
This position was rooted in fear of contagion in financial markets. However, the ministers’ efforts to avoid a default rating while ensuring private creditor participation in the Greek rescue effort have proved fruitless.
At their meeting today, they are expected to examine the feasibility of moves which would lead to a “selective” or partial, temporary default on some Greek debt without leading to a full-blown default.
Senior officials acknowledge, however, that this is inherently risky and unpredictable with a clear danger of an upsurge of tension in markets.
Confrontation with the ECB would also be inevitable, as it has issued dire warnings that such manoeuvres would prove self-defeating by stoking volatility in markets.
Also on the table is the revival of a plan rejected four months ago in which the euro zone bailout fund — the European Financial Stability Facility — would intervene in markets to buy Greek debt at a discount to its original value.
Consideration may also be given to another lowering of the interest rate on Greece’s rescue loans.