Through the Wire

Greece, Creditors Edge Closer to Deal

January 20, 2012
| Economics
| Europe

By Lefteris Papadimas and George Georgiopoulos

ATHENS, Jan 20 (Reuters) - Greece and its private bondholders inched closer to achieving a long-awaited debt swap deal on Friday that would prevent the country from sinking into chaotic default.

It would also ease some of the stress that has been battering the euro zone as it seeks to extricate itself from its debilitating debt crisis.

Cash-strapped Greece is fast running out of time as it pushes to wrap up an agreement by Monday paving the way for a fresh injection of aid before 14.5 billion euros ($18.5 billion)of bond redemptions fall due in March.

After a breakdown in talks last week over the coupon, or interest payment, that Greece must offer on its new bonds raised fears of a disastrous bankruptcy, the two sides resumed talks on Thursday and appeared to be moving to overcome their differences.

Bankers and sources close to the talks say an agreement was in sight, athough previous predictions of a quick resolution have proved premature.

"We are very close to wrapping it up," one banker told Reuters on condition of anonymity.

An official said a deal may be agreed before next Monday's meeting of euro zone finance ministers.

Greek Prime Minister Lucas Papademos, Finance Minister Evangelos Venizelos and Charles Dallara, the head of the Institute of International Finance (IIF) representing bondholders, were resuming talks on Friday morning.

According to one Greek banker, senior euro zone finance officials have scheduled a conference call for Friday afternoon.

 

HIGH STAKES

The stakes could not be higher. Greece needs to have a deal in the bag before funds are doled out from a 130 billion euro rescue plan that the country's official lenders, the European Union and the International Monetary Fund, drew up in October.

The paperwork involved alone is expected to take weeks, meaning failure to secure a deal soon could put Athens at risk of a chaotic default in March, which in turn could jolt the financial system and tip the global economy into recession.

A large chunk of the bond swap must be agreed by noon on Friday and formalised before Monday's meeting of euro zone finance ministers, Venizelos has said.

Adding to the pressure, officials from the "troika" of foreign lenders have begun meetings with the Greek government on Friday to discuss reforms and plans to finalise that bailout package.

"Now is the crucial moment in the final battle for the debt swap and the crucial moment in the final and definitive battle for the new bailout," Venizelos told parliament on Thursday. "Now, now! Now is the time to negotiate for the sake of the country."

VARIABLE COUPON

Progress has been hard to come by in the latest round of negotiations, with bankers worried about suffering losses far higher than the 50 percent writedown they were expected to take on the nominal value of their bonds.

Actual losses for investors are expected to be much higher depending on the terms, such as the coupon, being negotiated.

A source close to the talks earlier said Athens and its foreign lenders had initially offered a coupon of just over 3.5 percent, but bondholders rejected that as too low. They were seeking a coupon of at least 4 percent, the source said.

One of the options being considered is a coupon that rises after staying stable for the first 10 years, another source close to the talks has said.

According to Greek press reports not identifying their sources, the two sides may agree a coupon ranging between 3 and 5 percent, depending on the new bonds' maturities, resulting into a net present value loss for investors between 65 and 70 percent.

Investors have also bridled at Greece's threat to enforce losses if not enough bondholders sign up to the deal.

 

The swap is aimed at cutting 100 billion euros off Greece's over 350 billion euro debt load.

Greece is stumbling through its worst economic crisis since World War Two, with unemployment at record highs and near-daily protests and strikes against austerity measures that have deepened an already brutal recession.

Nearly one out of two youths is unemployed and anger against waves of tax hikes and pay cuts is running high.

Its latest bailout - drawn up on condition Greece pushes through painful cuts and structural reforms - is expected to reduce Greece's debt to a more manageable 120 percent of gross domestic product in 2020 from about 160 percent now.

 

POLITICAL TROUBLES

But the EU's economic affairs commissioner Olli Rehn warned on Friday that Greece's rescue could still derail if the country's politicians fail to fully embrace reform and he urged Europe's biggest parties to put pressure on them to do so.

"If they (the Greeks) are not making progress it is for domestic political reasons. It is crucial that major European political parties contact their political families in Greece to convince their leaders to make a firm commitment to the EU aid package," Rehn said in an interview in German newspaper Sueddeutsche Zeitung.

Papademos late on Thursday met the leaders of the three parties backing him, trying to iron out differences between them ahead of the troika talks. The conservative New Democracy party, in particular, is reluctant to agree to further pension cuts demanded by Greece's lenders.

"The views (of the parties) have converged and there will be further talks in order to reach total convergence," government spokesman Pantelis Kapsis told TV station Antenna on Friday. (Writing by Harry Papachristou and Deepa Babington; additional reporting by Athens bureau and Stephen Brown in Berlin; editing by David Stamp/Chris Pizzey)

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