France Signals a Shift on Greece!!!!! Lagarde Suggests That a Rescheduling of Debt Is an Option if Banks Agree

PARIS—French Finance Minister Christine Lagarde signaled Paris might support a rescheduling of Greek debt, warning that Greece is at risk of default if it doesn't do more to bring its public finances into order.


The comments mark a shift in France's position in a debate that has pitted Germany and other euro-zone governments against the European Central Bank, which opposes any form of restructuring of Greek debt.


City workers scuffle with police during a demonstration this week in front of the Greek Parliament in Athens.


French support for proposals to extend the maturities of Greek debt—a so-called soft restructuring—would leave the ECB isolated in its opposition.


and possibly force it to accept a compromise.


"What we certainly don't want is a state bankruptcy, a default, in Europe," Ms. Lagarde said in an interview published Friday in Austria's Der Standard newspaper. "You can use a lot of words—reprofiling, restructuring, re-this, re-that—but what there won't be is a restructuring of Greek debt." At the same time, she said: "We would accept anything that is based on a voluntary accommodation by banks."


"If the banks decided unilaterally after contacting the Greek authorities to offer a lengthening of the repayment time frame, she wouldn't be against it," Ms. Lagarde's spokesman said.


Germany and other euro-area states have warmed to the idea of extending maturities—which is technically considered a default by the credit-ratings agencies—given the size of Greece's debt burden and its bleak economic prospects. France previously sided with the ECB in opposing any form of restructuring, but Ms. Lagarde's comments suggest Paris is softening.


The standoff between the ECB and euro-area governments reflects how intractable the Greek crisis has become. A year after extending Athens a bailout, it has become clear the €110 billion ($157 billion) Greece was promised by its euro-zone neighbors and the International Monetary Fund won't be enough to solve its financial crisis. Europe must now decide whether and how to keep Greece from defaulting.
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The ECB worries that a restructuring, in any form, would do irreparable damage to the euro-zone's reputation with investors. Germany and euro-area states, in turn, are concerned about the political cost of continuing to support Greece without forcing Athens and its creditors to make concessions.


The central bank kept up its insistence Friday that even a soft restructuring is unacceptable, and again threatened to withhold funding for Greek banks, with the warning this time coming from the newly installed head of Germany's central bank.


Changing Greek bond maturities "cannot substitute for fulfilling the adjustment program," undertaken by Greece, Bundesbank President Jens Weidmann said. A reprofiling in the current market environment "would make it impossible to accept them as collateral for refinancing operations under the existing rules of the Eurosystem's collateral framework, and consequently large parts of the Greek financial sector would be cut off from funding," he said.


Mr. Weidmann's reference to the ECB's existing collateral rules reinforced those Wednesday by his countryman Jürgen Stark. Mr. Stark, Germany's representative on the ECB's executive board, caused a stir by flatly ruling out Greek bonds as collateral under a restructuring, saying: "sovereign-debt restructuring would undermine the eligibility of Greek government bonds."


The united front from the ECB's German contingent reflects the central bank's worry over the contagion effects of even a soft restructuring on the European banking system.


The ECB is a lifeline to Greek banks that are unable to meet their financing needs in private markets. Greek banks can borrow unlimited amounts from the central bank, and post Athens debt as collateral. If the ECB rejects Greek bonds, the banking system could collapse.


Many observers think the ECB wouldn't permit such a scenario despite its recent rhetoric, and that officials would change existing rules—as they have in the past—to prevent such a scenario.


A bad week was topped off late Friday in Europe when Fitch Ratings downgraded Greece's senior debt by three notches to B-plus, on a par with Venezuela, Sri Lanka and the Caucasian republic of Georgia. Meanwhile the IMF's executive board approved its €26 billion portion of a bailout package for Portugal. The IMF said the package, detailed earlier this month, would provide about €37.8 billion this year "to allow Portugal some breathing space from borrowing in the markets" while it takes steps to cut government spending and stabilize its banking system.