Greece’s creditor banks broke off talks after failing to agree with the government about how much money investors will lose by swapping their bonds, increasing the risk of the euro-area’s first sovereign default.
Proposals by a committee representing financial firms haven’t produced a “constructive consolidated response by all parties,” the Washington-based Institute of International Finance said in a statement yesterday. Talks with Greece and the official sector are “paused for reflection on the benefits of a voluntary approach,” the group said.
Greek officials and the nation’s creditors agreed in October to implement a 50 percent cut in the face value of Greek debt, with a goal of reducing Greece’s borrowings to 120 percent of gross domestic product by 2020. More than two months after the accord was announced, the two sides still need to agree on the coupon and maturity of the new bonds to determine losses for investors. The IIF had aimed to implement the swap this month.
“The sticking point is actually coming down to what the interest rate would be on the new bond,” Hans Humes, president of Greylock Capital Management LLC and a member of committee negotiating the deal with the government, said in an interview on Bloomberg Television’s “InBusiness with Margaret Brennan.” If the talks fail and Greece defaults, “there will be a lot of contagion,” he said. “The ball is in their court. If you want to do something to head off what could be a disorderly process, now’s the time.”
Talks to Resume
Talks between Prime Minister Lucas Papademos, Finance Minister Evangelos Venizelos and Charles Dallara, the managing director of the IIF, will resume on Jan. 18 as more work is needed after yesterday’s consultations, according to a Greek Finance Ministry official who declined to be identified. Today, the IIF said there is a “tentative plan” for Dallara and Jean Lemierre to return to Athens mid-week, “but this depends on developments over the next few days.”
Greece is aiming to reach the framework for a deal next week, when talks on terms for a second financing agreement with European Union and International Monetary Fund officials start in Athens. A deal on the swap must be struck before March 20, when Greece must make a 14.5 billion-euro bond payment.
“We look forward to the resumption of talks between Greece and its creditors,” an IMF spokeswoman said in a statement. “It is important that this leads to a PSI agreement that, together with the efforts of the official sector, ensures debt sustainability.”
Papademos said yesterday the successful completion of the swap was imperative for Greece to receive international aid.
“We are fully aware of how critical the situation is,” he said in a speech in Athens, according to a transcript. “Until these processes are completed, the private sector involvement and the vote on the new loan accord, the country continues to face acute economic risks. Only once these two processes are completed can we say Greece is on firmer footing.”
France and Austria lost their top credit ratings yesterday in a string of downgrades that left Germany with the euro area’s only stable AAA grade as Standard & Poor’s warned that crisis-fighting efforts are still falling short. It’s “premature” to think that Greek debt talks have collapsed, London-based S&P analyst Frank Gill said on a conference call today.
European governments have been pushing for the Greek debt to carry a coupon of 4 percent, said a person with direct knowledge of the negotiations. Private bondholders said they would accept those terms for a period of time if they were able to get a bigger payout later as Greece’s economy recovered, said the person, who declined to be identified. The IMF probably sought a coupon close to 2 percent for the Greek debt swap, Le Figaro reported today.
“In the end, they’ll need to reach an agreement,” said Matthias Engelmayer, a Frankfurt-based analyst at Independent Research GmbH. “No one is interested in a disorderly default.”
The Greek bond due October 2022 rose, pushing the yield six basis points lower to 34.36 percent in London yesterday. The price climbed to about 20.5 percent of face value.
The committee had offered a 50 percent nominal reduction of Greece’s sovereign bonds in private investors’ hands and as much as 100 billion ($127 billion) of debt forgiveness, the IIF said.
Greece hasn’t yet decided whether to submit legislation that could force holders of the nation’s debt to take part in a bond swap, according to a government spokesman who said his earlier remarks on the matter were misinterpreted.
A report in Ta Nea newspaper yesterday said Venizelos may submit legislation on so-called collective action clauses by Jan. 16. The legislation, discussed and approved at a meeting of EU officials in Brussels yesterday, would require bondholders to participate in a debt swap that would cut the face value of their securities if a deal is reached with a majority of Greek debt holders, Ta Nea said, without citing anyone.
“There is no decision on if and when,” Pantelis Kapsis said by telephone yesterday.
Some analysts have said hedge funds holding Greek bonds may resist the deal, seeking to reap greater profit by triggering payouts from credit-default swaps.
“The various parties are testing how far they can push their agenda,” Engelmayer said. “I think they’ll have to reach a deal because there’s so much pressure.”
German Chancellor Angela Merkel, who met with French President Nicolas Sarkozy earlier this week, said at the time the debt restructuring needs to be completed soon to enable Greece to receive its next tranche of aid.
“The second Greek program, including the debt restructuring, has to be carried out quickly now because otherwise it won’t be possible to pay out the next tranche for Greece,” Merkel said on Jan. 9. Greece “really has to implement the commitments made to the troika” of the IMF, the European Commission and the European Central Bank, she said.
The IMF had sought a lower coupon than the range offered by investors to ensure Greece meets the deficit targets amid a worsening economy. Failure to complete the voluntary swap threatens to further undermine confidence in the EU’s leadership during the crisis, as well as deter investors from Asia and the U.S. from buying Europe’s debt.
“The current rescue program doesn’t work and requires a rethink that needs to be done very quickly to keep Greece from defaulting,” said Christian Schulz, a senior economist in London at Berenberg Bank. “The risk is high and the stakes are high: that Greece will be let go from the euro.”