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 put forward by a committee representing financial firms have “not produced a constructive consolidated response by all parties,” the Washington-based Institute of International Finance said in a statement today. “Discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach.” The government said the two sides will reconvene discussions in five days.
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 the total losses for investors.
“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.”
The talks were halted today after the two sides failed to agree on the coupon for the new bonds, said a person with direct knowledge of the negotiations. European governments have been pushing for the Greek debt to carry a coupon of 4 percent, the person said. 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, the person said.
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 today’s second day of consultations, according to a Greek Finance Ministry official who declined to be identified.
The Greek bond due October 2022 rose, pushing the yield six basis points lower to 34.36 percent at 5:20 p.m. London time. The price climbed to about 20.5 percent of face value.
“This is bad news because they’ve been negotiating for months to overcome differences,” said Matthias Engelmayer, a Frankfurt-based analyst at Independent Research GmbH. “In the end, they’ll need to reach an agreement because no one is interested in a disorderly default for Greece.”
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 today said Venizelos may submit legislation on so-called collective action clauses by Jan. 16.
The legislation, which was discussed and approved at a meeting of European Union 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 reported, without citing anyone.
“There is no decision on if and when,” Pantelis Kapsis said by telephone today.
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.”
Greece is aiming to reach the framework for a deal next week, when talks on terms for a second financing deal with European Union and International Monetary Fund officials start in Athens. The deliberations on the debt swap need to end by March 20, when Greece must make a 14.5 billion-euro bond payment. Dallara said in November the IIF aims to implement the Greek debt swap in January.
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.