Banks, Greek authorities and other officials are pushing ahead with work on a proposed bond exchange, even as political turmoil cast doubt on when Greece’s next rescue package might be implemented.
“We assume that the agreement reached on Oct. 26 and 27 would remain in operation,” said Hung Tran, deputy managing director of the Institute of International Finance, a Washington-based banking trade group that negotiated the bond exchange as part of marathon talks in Brussels last week. Work on technical details continues, even though there’s no timeline for when the swap and broader rescue effort might take place.
Greek Prime Minister George Papandreou clung to power today after abandoning a referendum on bailout terms that had triggered a suspension of European aid. Italian Prime Minister Silvio Berlusconi was pushed by German Chancellor Angela Merkel to accelerate an austerity drive as his country’s bond yields jumped to a euro-era record.
The IIF is backing the debt swap, which it describes as a voluntary program that will take shape as authorities work out details of the maturity, coupon and collateral terms for the new bonds. “We may as well use the time to do that and then we’ll see where we are in the next few days,” Tran said by phone today.
European leaders agreed to boost the European Financial Stability Facility’s firepower to 1 trillion euros ($1.4 trillion), set aside 100 billion euros for Greece and provide 30 billion euros in collateral for a debt swap that will give Greece’s investors new, lower-risk bonds at 50 percent off the existing debt’s face value.
Tran also praised the European Central Bank’s decision today to cut interest rates. The ECB unexpectedly and unanimously lowered the benchmark interest rate by 25 basis points to 1.25 percent at Mario Draghi’s first meeting as president.
“I think that is a wise move and will do its part to help sustain the economy,” Tran said. The rate cut is a “a very good decision on the part of Mario Draghi, who looked at all the evidence in front of him.”