European governments dropped clues that bondholders may have totake bigger losses on Greek debt in a second aid package, asGreece's deteriorating economic outlook forces bolder steps toquell the fiscal crisis.

Finance ministers considered reshaping a July deal that foresawinvestors contributing 50 billion euros ($66 billion) to a159-billion euro rescue. That private sector involvement, or PSI,includes debt exchanges and rollovers.

“As far as PSI is concerned, we have to take into account thatwe have experienced changes since the decision we have taken onJuly 21,” Luxembourg Prime Minister Jean-Claude Juncker toldreporters early today after chairing a meeting of euro financechiefs in Luxembourg. “These are technical revisions we arediscussing.”

Together with plans to get more firepower out of the region's440 billion-euro rescue fund, the review of Greece's aid packagewas a response to growing international frustration with Europe'sinability to get to grips with the crisis after 18 months ofincremental steps. Europe's woes contributed to last quarter'sslump in global stocks, the biggest since the aftermath of the 2008collapse of Lehman Brothers Holdings Inc.

Juncker gave no details about a possible recalibration of thedebt exchange. The talks came after seven countries includingGermany, Europe's dominant economy, weighed calling for Greek bondwritedowns of as much as 50 percent, two European officialssaid.

Decision Postponed
The ministers also pushed back a decision on the release ofGreece's next 8-billion euro loan installment until after Oct. 13.It was the second postponement of a vote originally slated foryesterday as part of the 110-billion euro lifeline granted toGreece last year.

“The endgame for Greece has now begun,” Sony Kapoor, managingdirector of policy group Re-Define Europe, said in an e-mailednote. “It seems that the ground is being laid to revisit theprivate sector involvement agreement reached in July.”

European stocks and the euro fell yesterday and investorsshunned riskier countries' bonds amid concern that the crisis iscareening out of control. Europe's financial leaders are fightingon multiple fronts, trying to repair Greece's economy whileinsulating Italy and Spain and shoring up banks that theInternational Monetary Fund says face as much as 300 billion eurosin credit risks.

Euro's Drop
The euro has dropped about 8 percent since the end of August,trading at $1.3191 as of 12:38 p.m. in Tokyo. Greg Gibbs, acurrency strategist at Royal Bank of Scotland Group Plc in Sydney,said “there's so much uncertainty still over Europe and the wayforward that you can't be confident” the euro will hold above $1.30by year-end.

“There's still a sense that they're stalling and unwilling to gothrough with their agreement from July 21 in terms of the bailoutfor Greece and that's creating a sense that Greece is closer todefault or they may be forced into some bigger defaultarrangement,” Gibbs said.

Scrounging for savings, the Greek cabinet on Oct. 2 announced6.6 billion euros of cuts, mostly by slashing public payrolls.Greece will “very likely” have to make extra reductions for 2013and 2014, a two-year phase that will be the focus of the rest ofthe review by European Union, European Central Bank and IMFofficials, EU Economic and Monetary Commissioner Olli Rehnsaid.

Deficit Goal
Greece's revised 2011 deficitgoal may be 8.5 percent of gross domestic product compared with aprevious target of 7.6 percent, Rehn said. He called the new target“plausible” and lauded Greece's “important steps” toward furthersavings next year.

While an Oct. 13 meeting to decide on the next payout wascanceled, Juncker said he is “nevertheless optimistic when it comesto the issue of the disbursement.” The decision now dovetails withan Oct. 17-18 summit of European government leaders to address thecrisis.

“Greece is not the scapegoat of the euro zone,” Greek FinanceMinister Evangelos Venizelos said. “Greece is a country withstructural difficulties.”

Fund Firepower
Finance ministers held a firstdiscussion over how to further enhance the region's rescue fund,setting aside a plea by German Finance Minister Wolfgang Schaeubleto postpone that debate until the remaining countries have endorsedthe fund's latest upgrade.

Fourteen of the 17 euro countries have approved thereinforcement, which will empower the European Financial StabilityFacility to buy bonds on the primary and secondary markets, offerprecautionary credit lines and enable capital infusions forbanks.

Juncker announced “good progress” on the credit lines andbank-recapitalization tools. Avoiding the word “leveraging,” hesaid work is under way to scale up the fund's capacity withoutrequiring each country to chip in more.

“We are checking if yes or no we could increase the efficiencyof the different instruments,” Juncker said. Asked whether the ECBwould be tapped to boost the fund's clout, he said: “I don't thinkthat this will be the main avenue of our considerations.”

Finnish Deal
The ministers also smoothed asnag en route to a second Greek package by settling the terms underwhich collateral will be offered to AAA rated Finland, home to aeuro-skeptic movement that catapulted to third place in Aprilelections by opposing further bailouts.

While the party now known as “The Finns” didn't make it into theruling coalition, it captured the Finnish mood and hardened thestance of new Prime Minister Jyrki Katainen in the euro-rescuebartering.

Under the accord, Greek bonds will be transferred from Greekbanks to a trustee, which will sell them and invest the proceeds inAAA rated bonds with maturities of 15 to 30 years.

In exchange for the special treatment, Finland will speed itspayments into a planned permanent rescue fund and forego a share ofprofits from EFSF emergency loans. In the event of default, itcouldn't cash in on the collateral until Greece's official loansmature, possibly as long as 30 years.

“It's a complicated financial structure,” said EFSF ChiefExecutive Officer Klaus Regling, who brokered the collateralarrangement. He and Juncker said Finland is the only country likelyto take advantage of it.

Regling deserves “the Nobel prize for economics or the Nobelpeace prize” for engineering the compromise, Rehn said.

Bloomberg News

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