Euro rallies as investors eye French plan for Greece

The Euro firmed against major currencies in trade on Tuesday as investors appeared re assured by reports of an unexpected French-led plan to help Greece avoid defaulting on its debt.

Reuters

The plan, devised by French banks and discussed at a meeting of insurance and bank chiefs and EU officials yesterday in Rome, is a replica of the Brady bonds used to bail out Latin America in 1989.

Under the deal, private banks, who are owed billions of Euros by Greece, would agree to extend half of the debt maturing over the coming 3 years into new 30 year bonds.

The loans would be put on the level of European loans, indexed on Greek growth.

French bank BNP is the biggest single holder of Greek sovereign debt, with about five billion euros of exposure.

The arrangement would allow Greece to get on top of its debt mountain, which is now worth more than a year and a half of the country's total output.

French president Nicolas Sarkozy, who is determined to defend the euro, supports the plan and said yesterday that he hoped fellow EU governments would also back it.

Germany in particular has long favoured the idea that private investors should bear part of the cost of a second rescue for Greece, though German bankers are likely to argue for shorter maturities under the agreement.

It is important that any changes to the Greek debt cannot be described as a default by credit rating agencies, as a default rating could trigger disaster for the euro.