Bondholders negotiating a debt swap with Greece may get asweetener tied to a revival in economic growth that would ease theimpact of accepting a lower interest rate on the new bonds, peoplewith knowledge of the talks said.

In discussions late last week in Athens, creditors lowered theirdemands for an average coupon on the new 30-year securities theywould receive to as little as 3.6 percent from 4.25 percent afterEuropean officials demanded they take steeper losses, peoplefamiliar with the matter said at the time.

While the lower coupon would lead to an estimated loss of 70percent or more for investors, adding a so-called gross domesticproduct warrant — which would pay bondholders more if the Greekeconomy rebounds — would trim the loss in net present value termsby an estimated 0.5 to 3 percentage points, said two people, whodeclined to be identified because the talks are confidential.

“It's like a concession from the Greek government, so it'ssomething that presumably smoothed negotiations,” said MatthewCzepliewicz, a London-based bank analyst at Collins StewartHawkpoint Plc. “When you are in the middle of turmoil you're goingto be conservative, and bank investors are unlikely to attributeany value to these warrants, even if they could prove valuable inthe future.”

Greece and private creditors are near an accord that would inprinciple include the warrants, the people said. As an additionalinducement for creditors, the debt would probably be governed underU.K. rather than Greek law, providing more bondholder protection,people familiar with the situation said.

These matters may still change, and questions over whetherGreece can fulfill conditions for a second aid package from theEuropean Union and International Monetary Fund have put the accordon hold for the moment, they said.

The Greek government is “one step from closing” a debt- swapdeal with its private bondholders, Finance Minister EvangelosVenizelos told reporters in Athens yesterday. The sides are closeto completing a voluntary exchange within a framework outlined byLuxembourg Prime Minister Jean-Claude Juncker, the Washington-basedInstitute of International Finance, which is negotiating on behalfof creditors, said last week.

Talks with EU and IMF officials on a new financing package forGreece must be completed by Feb. 5, Venizelos also said at aParliament hearing. A private-creditor debt swap, for which apublic offer must be made by Feb. 13, can only proceed after a dealon the loan package is sealed, he said.

Debt Exchange

EU leaders on Jan. 30 held their 16th summit in the two yearssince the Greek debt emergency provoked a Europe-wide crisis,leading to aid packages for Greece, Ireland and Portugal. Greecepledged a last-ditch effort to prevent the collapse of its secondrescue package from creditors, aiming to complete talks this weekon a financial lifeline that's been in the works for sixmonths.

Prime Minister Lucas Papademos said in Brussels he would try tomeet German-led demands for a bigger debt writedown by investorsand deeper budget cuts by his government.

Greece and its creditors are seeking to seal a debt-swap dealthree months after private bondholders agreed to a 50 percent cutin the face value of more than 200 billion euros ($262 billion) ofdebt by voluntarily exchanging bonds for new securities.

The aim is to reduce Greece's debt burden to 120 percent of GDPin 2020 — an objective complicated by a deepening economiccontraction. An accord is tied to the second bailout for thecountry, which faces a 14.5 billion-euro bond payment March 20.

After two years of wage cuts and tax increases, the Greekeconomy was expected to shrink about 6 percent last year, accordingto the latest IMF estimates, compared with a forecast of 3.8percent made in June.

Bloomberg News

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