Greek Debt-Swap Talks Set for Second Day in Push for Accord

Lucas Papademos
Greek Prime Minister Lucas Papademos waves as he arrives for an EU summit in Brussels, Belgium on Dec. 8, 2011. Photographer: Geert Vanden Wijngaert/AP

Greece’s government heads into a second day of talks with private creditors in a push to reach an accord that would slash the nation’s debt and avert a collapse of the economy.

Talks with officials from the Institute of International Finance, which represents bondholders, will continue today, Greek Finance Minister Evangelos Venizelos told lawmakers in Parliament in comments televised live on state-run Vouli TV. The meeting will be held around 7 p.m. Athens time, a spokeswoman from the prime minister’s office said by phone.

“Critical negotiations are taking place with the representatives of the private sector on how they will participate as radically and generously as possible” in the debt swap, Venizelos said. “This must be voluntary and lead to across the board participation, meaning 100 percent.”

Prime Minister Lucas Papademos is racing to tie up the accord, key to a second financing package for the cash-strapped country, before a March 20 bond payment that will cost 14.5 billion euros ($18.6 billion) Greece doesn’t have. Private investors agreed in October to accept a 50 percent reduction in the face value of their Greek bonds in a debt swap. Since then, the parties have been at odds over the coupon on the new securities, which will help determine the bondholders’ losses.

New Proposals

The talks broke off Jan. 13 and resumed yesterday with Papademos, 64, and Venizelos, 55. IIF Managing Director Charles Dallara, 63, and Jean Lemierre, 61, a special adviser to the chairman of BNP Paribas SA, are leading the negotiations for the creditors.

Greece’s government could forge an agreement on a voluntary debt swap with private creditors by the end of this week, one finance ministry official told reporters in Athens before the talks ended yesterday. The official declined to be identified.

A separate government official said earlier that “all variables” are being taken into consideration and the parties are back with new proposals.

While the interest payment on the new bonds is the most visible aspect of the negotiations it’s not the only one, said the official, who declined to be identified. Collective action clauses, which would ensure creditors take part in the swap, could be legislated if the participation rate isn’t high enough, the official said.

IMF Role

Greek two-year notes dropped, pushing the yield up 41 basis points, to 171 percent at 1:31 p.m. in Athens. Earlier in the day the yield climbed to a record 189.88 percent. The Greek security maturing in October 2022 advanced for an eighth day, with the yield sliding 17 basis points to 33.53 percent.

An agreement reached Oct. 26 with European Union leaders and the Washington-based IIF, a lobby group for global financial institutions, called for private holders of just more than 200 billion euros worth of Greek government bonds to accept new securities with a face value of half that amount. As part of the deal, euro-zone members agreed to provide 30 billion euros in unspecified support. That could take the form of buying bonds from the private holders at 100 cents on the euro in cash, leaving them with new bonds with a face value of 70 billion euros.

The International Monetary Fund’s executive board yesterday agreed to let IMF staff start discussions on the second financing package. Talks on the package will enter the “final phase” as Greek officials start meetings tomorrow with the heads of a European Commission, IMF and European Central Bank mission to Athens, Venizelos said.

Coupon in Question

The debt swap negotiations since the Oct. 26 summit have centered on the interest rate the new bonds will pay, with Germany among those insisting on a low rate and the private creditors demanding a higher one.

A member of the investor group said they are likely to get cash and securities with a market value of about 32 cents per euro of government bonds.

“I’m highly confident the deal will get done,” Bruce Richards, chief executive officer of New York-based Marathon Asset Management LP, said in a telephone interview on Jan. 17 with Bloomberg Businessweek.

Marathon, which has $10 billion under management, is on the committee of 32 private creditors formed in November to negotiate with Greece, the IMF and the EU. It’s not a member of the smaller steering committee directly involved in negotiations.

Credit Default Swaps

The new bonds will probably pay annual interest of 4 percent to 5 percent and have a maturity of 20 years to 30 years, Richards said. They may trade for about half of their face value, he predicted. Altogether, the net present value of the deal for the bondholders will be about 32 cents on the euro, he estimated.

Fitch Ratings has said the October agreement would amount to a “default event” once implemented, while the International Swaps and Derivatives Association has said it wouldn’t trigger credit-default swaps bought by investors as insurance against the country failing to meet its obligations.

The creditors’ steering committee includes representatives from banks and insurers with the largest holdings of Greek government bonds, including National Bank of Greece SA, BNP Paribas, Commerzbank AG, Deutsche Bank AG, Intesa Sanpaolo SpA, ING Groep NV, Allianz SE and Axa SA.

Financial firms on the IIF’s private-creditor investor committee, the larger group that includes the smaller steering committee, hold more than 47 billion euros in Greek sovereign debt, according to data compiled by Bloomberg from company reports.

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