Greece Talks Enter ‘Final Phase’ on 2nd Bailout

Greek talks with international creditors in a seven-month effort to wrap up a second bailout will continue today after negotiations overnight failed to clinch an agreement, with the country’s stability hanging in the balance.

“After 12 hours of tough talks, we solved a lot of issues,” Greek Finance Minister Evangelos Venizelos told reporters in Athens. “There are still open issues.” He said talks will resume later today.

A plan that’s been in the works since July may emerge from the talks between international monitors and Greek officials, which are running in parallel with discussions among caretaker Prime Minister Lucas Papademos’s coalition members and Greece’s government and its creditors.

The discussions have led to tussles among European central bankers and political leaders. The rescue blueprint includes a loss of more than 70 percent for bondholders in a voluntary debt exchange and loans that will probably exceed the 130 billion euros ($171 billion) now on the table.

Open questions involve how much more aid Greece needs, how much more austerity is required, and how to involve the European Central Bank in the debt swap. Facing a 14.5 billion-euro bond payment on March 20 and general elections as soon as April, Papademos must heed calls for tighter austerity to complete the talks on a second aid package in time.

Final Phase

“We are in the final phase of this very critical process to shape a new financing program for Greece and to complete the loan agreement which will lighten the burden of public debt and ensure funding for years to come,” Papademos said in a statement yesterday in Athens. The plan will help “restore fiscal stability, improve competitiveness, revive the economy and increase employment.”

The ECB is considering using its bond holdings to bolster Greece’s next rescue program and support efforts to contain the sovereign debt crisis, three euro-region officials said. The ECB has purchased 219 billion euros of debt-strapped nations’ bonds since 2010 and between 36 billion euros and 55 billion euros are invested in Greek sovereign debt, according to estimates by Barclays Capital and UBS AG.

The euro was little changed against the dollar at $1.3146 at 4:42 p.m. yesterday in New York. The yield on Germany’s benchmark 10-year bond rose 8 basis points to 1.93 percent, while the yield on Greek 10-year bond fell 18 basis points to 34.19 percent.

More Funds

Venizelos was closeted in meetings most of yesterday with members of the so-called troika -- the European Commission, the ECB and the International Monetary Fund -- over what the country has to do to receive more funds. Papademos is set to meet with the leaders of the three political parties backing him to discuss the measures once talks with creditors wrap up.

Debate has raged among Greek officials and politicians over issues ranging from how the Greek state will recapitalize the country’s banks once the debt writedown is completed to state spending cuts and labor reforms that may reduce wages for private-sector employees.

Underlining the complexity of the task for Papademos, representatives of Greek employers and the country’s biggest private sector union yesterday called on Papademos to resist pressure to cut the national minimum wage and holiday allowances.

Greece has lagged behind budget targets set when it won an initial, taxpayer-funded rescue of 110 billion euros in May 2010, prompting euro-area threats to cut off aid and hastening a German push to make bondholders contribute. The country is in its fifth year of recession, with a budget deficit still close to 10 percent of GDP and unemployment of around 18 percent.

‘Bottomless Pit’

“We can’t pay into a bottomless pit,” German Finance Minister Wolfgang Schaeuble said on Feb. 2. “Greece needs a new program, there’s no question about that, but Greece must create the conditions for it.”

The finance ministers of the AAA-rated euro countries -- Germany, Luxembourg, the Netherlands and Finland -- met yesterday in Berlin to discuss options.

They didn’t discuss a higher public-sector contribution to Greece, reflecting reluctance to place bigger burdens on their taxpayers, said a person familiar with the talks.

Papademos’s spokesman, Pantelis Kapsis, denied news reports yesterday that the leader would resign if leaders of the parties backing his interim government refused to agree to additional conditions for new financing.

Debt Concerns

Greece remains in intensive care more than two years after triggering Europe’s debt crisis. Even after a second bailout, it may be saddled with too much debt, too little growth and too large a budget hole to do without even more money that euro nations led by Germany are increasingly reluctant to offer.

The lead negotiators of the creditors’ steering committee working on a debt accord with Greece, Charles Dallara, managing director of the International Institute of Finance, and Jean Lemierre, a senior adviser to the chairman of BNP Paribas SA, will return to Athens this weekend to continue talks, IIF spokesman Frank Vogl said in an e-mail.

The group, based in Washington, has more than 450 financial firms as members and is representing private creditors in the talks. Deutsche Bank AG Chief Executive Officer Josef Ackermann, the chairman of the group, may also travel to the Greek capital this weekend for talks over the swap involving Greek debt with a face value of about 200 billion euros.

Those talks are happening in parallel with those with the troika, Venizelos said “but that’s now the easiest part of the process.”

The minister said he will brief euro area finance ministers by phone later today on the status of the talks and that a meeting of the ministers will be held on Feb. 8.

Bond Swap

Creditors are prepared to accept an average coupon of as low as 3.6 percent on new 30-year bonds in the exchange, said a person familiar with the talks, who declined to be identified because a final deal hasn’t been struck yet. The aim is to cut the debt load to 120 percent of gross domestic product by 2020 from 162 percent in 2011. The alternative is an uncontrolled default that may lead to deeper losses, the collapse of Greece’s financial system and ripple effects throughout Europe.

More austerity risks triggering a “social explosion,” Hieronymos II, the head of Greece’s Orthodox Church, said in a statement posted on the website of the Archdiocese of Athens.

“We are being asked to take even larger doses of a medicine that has proven to be deadly and to undertake commitments that do not solve the problem, but only temporarily postpone the foretold death of our economy,” the Archbishop said.

To contact the reporters on this story: Marcus Bensasson in Athens at mbensasson@bloomberg.net; Jonathan Stearns in Brussels at jstearns2@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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