This Irish Times is reporting the that EU-IMF are “examining” burden sharing for senior bondholders.   Several proposals are being discussed, but the major focus is on two ideas: 1) bank debt-for-equity conversions; and 2) option of providing fresh capital injections or face a haircut on original principal.   The Irish Times writes,

Several proposals are on the table, said a source. At present attention centres on two similar schemes. In the first, bank debt would be converted into equity shares. In the second, bond investors would be given the choice of injecting fresh capital into banks or face a cut in their investment.

The source said there was a “common understanding” between delegations from the EU Commission, the European Central Bank and the IMF that senior and junior bondholders should each pay a share of the rescue costs.

The first step would be to seek to “persuade” senior bondholders to participate in the bailout, said the source. “If that doesn’t succeed, the question is how can you force them in a legally-sound way.”

Finally!  The recognition that the problem will only be solved by reducing debt, not increasing it.  This is a tricky and delicate issue, however, as it may induce further bank runs that could spread into Spain.  They need to be decisive and move quickly.  One reason the emerging markets are so strong today is that many countries reduced their debt burdens during the 1990’s when the restructurings of the 1990’s that finally started to focus on debt reduction.  Both Brazil and Russia were in default not much more than 10 years ago and are creditors to the U.S. government.