New Greek aid package awaits private sector buy-in

International bankers and European Union officials made no progress today in securing a private sector contribution for a second bailout of Greece and bond yields climbed on concern about the scheme.

The managing director of the Institute of International Finance (IIF), a group representing around 400 banks and financial organizations, met representatives from the European Central Bank, the Greek government and the euro zone in Rome to try to break a deadlock over how private creditors might voluntarily maintain their exposure to Greek sovereign debt.

It was the latest in a series of meetings in recent weeks, but there is little sign of the parties reaching a deal. Today's meeting, which explored a possible buyback of Greek debt, broke up with no conclusion.

To avoid a debt default by Greece, euro zone finance ministers are trying to put together a second international bailout by mid-September. A private sector debt rollover, in which investors would buy new Greek bonds as existing ones matured, is an important part of the new rescue plan.

Until today, efforts had focused on a French proposal to roll over up to 70 percent of Greek debt maturing before the end of 2014, with a portion of that going into new 30-year Greek bonds that would be guaranteed by other AAA securities.

But attention has now shifted to the possibility of buying back Greek debt, or switching existing Greek bonds for longer-dated ones, which could trigger a default.

In a statement, the IIF said participants had discussed "debt buy-back approaches," but did not go into details.

Reflecting fading hopes for a breakthrough, one banking source commented before the meeting: "The circus moves to Rome."

Partly because of the insistence of the European Central Bank, governments and banks have been trying to put together a debt rollover that would not prompt credit rating agencies to declare a default – even a limited or "selective default." But that is proving very difficult.

Asked about such a possibility at a news conference after the ECB raised euro zone interest rates by a quarter of a percentage point to 1.5 percent, President Jean-Claude Trichet said: "We say 'no' to selective default or credit event."

Dutch Finance Minister Jan Kees de Jager told a Dutch newspaper today that if pressure needed to be put on the private sector to ensure its involvement was substantial, then that would just have to be done, despite the implications.

"I think we need to accept that a voluntary contribution is not realistic," he told Het Financielle Dagblad. "If a compulsory contribution from the banks leads to a short and isolated (credit) rating event, then that is not so bad."