French concession gives Greece break

France has pledged to throw another life preserver to Greece even as a major credit rating agency said the country's disastrous sovereign debt load was putting a strain on its own banks.

Banks pledge to roll over debts even as Moody's warns of Greek bank stress

European Central Bank President Jean-Claude Trichet, left, and European Commissioner for the Economy, Olli Rehn met with policymakers last week to discuss the Greek contagion. (Virginia Mayo/Associated Press)

France has pledged to throw another life preserver to Greece even as a major credit rating agency said the country's disastrous sovereign debt load was putting a strain on its own banks.

French banks own more than $21 billion US worth of Greek debt, and French President Nicolas Sarkozy said the country's banks stand ready to roll over their holdings — meaning re-invest and allow Greece to push back the date they must be repaid — by another year.

"The idea is that we won't let Greece fall, we will defend the euro, it's in the interest of us all," he told a news conference Monday.

He urged other European debtors to follow suit. "It's a system that other countries could find useful,"Sarkozy said of the plan.

A Greek default would have grave consequences on all 17 countries that use the euro and rock markets worldwide. European leaders are trying to get the private sector to take part in a new rescue package under discussion for Greece.

Germany has a greater amount of Greek government debt than France. But France has a larger total amount of Greek debt because of its exposure to Greek private banks, mainly Credit Agricole's ownership of Emporiki Bank.

The finance ministry in Germany, which has pushed hard for private creditors to contribute, said it welcomes proposals from the private sector, as in the French case.

The German government "is still in talks with financial institutes, with banks and insurers, with major private creditors, for example investment funds," ministry spokesman Martin Kreienbaum said. He did not give details.

Default risk

The move is just the latest in the increasingly desperate attempts to allow Greece the time it needs to restructure its economy and ultimately pay back what it owes.

Greek lawmakers begin debating new austerity plans Monday that must pass this week if the debt-ridden country is to receive the critical next instalment of loans from its international bailout plan and avoid default.

Unless it gets more money, Greece will default on its debt in the middle of July.

'We won't let Greece fall, we will defend the euro, it's in the interest of us all.'—French President Nicolas Sarkozy

The deeply unpopular spending cuts and tax hikes in a mid-term austerity bill and an additional implementation law are expected to be voted on in parliament on Wednesday and Thursday.

They must be passed for the European Union and International Monetary Fund to release the next 12 billion euro batch of loans from the 110 billion euro bailout.

"The 12 billion euros of this fifth instalment is absolutely essential to service the cash needs of the public sector, which is in reality the servicing of citizens' immediate and vital needs," Finance Minister Evangelos Venizelos said over the weekend.

Prime Minister George Papandreou's Socialist party has a five-seat majority in the 300-member parliament, so should be able to pass the bills. However, Papandreou has faced an internal party rebellion over the measures, and at least two deputies have said they are considering not voting in favour.

Venizelos was meeting with the deputies in an effort to find a solution. He was also discussing with international creditors how to plug a 600 million euro shortfall in this year's budget, which could see extra measures included in the bills.

The latest French concession might not be enough, as a leading credit rating agency warned Monday that Greece's crisis was putting a strain on its banks.

Moody's says Greek bank deposits have declined by eight per cent this year. Deposits are also falling because households are tapping into their savings during the country's recession, which has seen the unemployment rate skyrocket to around 16 per cent.

A drop in bank deposits is troubling at the best of times, but it's especially vexing for Greece, because the country has been effectively locked out of bond markets because the yields investors demand are sky-high. The original bailout had envisioned that Greece would be able to start raising money on its own by 2012, something that looks exceedingly unlikely at this point.

"The potential for further deposit outflows constitutes a major liquidity risk for banks as depositor sentiment is affected by negative political developments and Greece's capability for timely repayment of its debt obligations," Nondas Nicolaides, a vice-president at Moody's, said Monday.

With files from The Associated Press