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Exclusive: Euro zone may drop bondholder losses from ESM bailout

By Julien Toyer and Luke Baker

BRUSSELS (Reuters) - Euro zone states may ditch plans to impose losses on private bondholders should countries need to restructure their debt under a new bailout fund due to launch in mid-2013, four EU officials told Reuters on Friday.

Discussions are taking place against a backdrop of flagging market confidence in the region's debt and as part of wider negotiations over introducing stricter fiscal rules to the EU treaty.

Euro zone powerhouse Germany is insisting on tighter budgets

and private sector involvement (PSI) in bailouts as a precondition for deeper economic integration among euro zone countries.

Commercial banks and insurance companies are still expected to take a hit on their holdings of Greek sovereign bonds as part of the second bailout package being finalized for Athens.

But clauses relating to PSI in the statutes of the European Stability Mechanism (ESM) - the permanent facility scheduled to start operating from July 2013 - could be withdrawn, with the majority of euro zone states now opposed to them.

The concern is that forcing the private sector bondholders to take losses if a country restructures its debt is undermining confidence in euro zone sovereign bonds. If those stipulations are removed, most countries in the euro zone argue, market sentiment might improve.

"France, Italy, Spain and all the peripherals" are in favor of removing the clauses, one EU official told Reuters. "Against it are Germany, Finland and the Netherlands." Austria is also opposed, another source said.

A third official said that while German insistence on retaining private sector involvement in the ESM was fading, collective action clauses would only be removed as part of broader negotiations under way over changes to the EU treaty.

Berlin wants all 27 EU countries, or at least the 17 in the euro zone, to provide full backing for alterations to the treaty before it will consider giving ground on other issues member states want it to shift on, officials say.

Germany is under pressure to soften its opposition to the European Central Bank playing a more direct role in combating the crisis, and member states also want Berlin to give its backing to the idea of jointly issued euro zone bonds.

German officials dismiss any suggestion of a 'grand bargain' being put together, but officials in other euro zone capitals, including Brussels, say such a deal is taking shape and suggest Berlin will move when it has the commitments it is seeking, although it's unclear when that will be.

German Chancellor Angela Merkel said after meeting French President Nicolas Sarkozy in Strasbourg on Thursday that there was no quid pro quo being set up.

"This is not about give and take," she said.

Euro zone finance ministers will discuss the ESM at a meeting in Brussels on November 29-30, including the implications of dropping collective action clauses from its statutes.

COMPLICATIONS

While most euro zone countries just want to forget about enforced private sector involvement, some are adamant that there must be a way to ensure banks and not just taxpayers shoulder some of the costs of bailing countries out.

Austria's opposition Green Party, whose support the government needs to secure backing for the ESM in the Vienna parliament, insists collective action clauses must remain a part of the ESM. It's also far from unclear whether the finance committee of the German lower house Bundestag would agree to such changes being made to the ESM.

Any changes to the mechanism would have to be approved by all member states and ratified by national parliaments before they can take effect, meaning fixed Austrian and German opposition could derail the push for changes.

Germany and some other member states were hoping to bring the ESM, which will have a lending capacity of 500 billion euros, into force as early as July next year, but disagreement over its structure could delay that.

(Reporting by Julien Toyer, John O'Donnell and Luke Baker in Brussels, Andreas Rinke in Berlin and Mike Shields in Vienna; writing by Luke Baker; editing by Rex Merrifield, John Stonestreet)

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