Bondholders negotiating a debt swap with Greece have made their“maximum” offer, leaving it to the European Union and InternationalMonetary Fund to decide whether to accept the deal, the negotiatorfor private creditors said.

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Charles Dallara, managing director of the Washington-basedInstitute of International Finance, said he's hopeful the EU andIMF will agree to terms for private investor involvement in arescue of Greece to avert a default and collapse of the economy.Negotiations were unresolved as EU finance ministers prepared tomeet in Brussels today.

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“The elements now are in place for an historical voluntary PSIdeal,” Dallara told Athens-based Antenna TV yesterday. “It's aquestion now, really, of the broader reaction of the Europeanofficial sector and, of course, of the IMF to this proposal.”

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European officials and the nation's private bondholders agreedin October to implement a 50 percent cut in the face value of morethan 200 billion euros ($258 billion) of Greek debt by voluntarilyexchanging outstanding bonds for new securities, with a goal ofreducing Greece's borrowings to 120 percent of gross domesticproduct by 2020. The accord is key to a second financing packagefor the cash-strapped country, which faces a 14.5 billion-euro bondpayment on March 20.

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German Chancellor Angela Merkel said today she doesn't see anyneed for interim financing for Greece because she expects thecountry to complete talks for a debt swap on schedule.

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“I expect that the negotiations with the private creditors andthe new Greece program can be completed simultaneously and soonenough that no new bridge loan whatsoever will be needed,” she saidin response to a reporter's question at a news conference withBelgian Prime Minister Elio di Rupo after the two leaders met inBerlin.

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Concern about the progress of talks helped drive Greek two- yearyields to an all-time high of 206 percent at 2:47 p.m. in Athens.The yield on Greek benchmark debt maturing in October 2022 fell 36basis points to 33.79 percent today, after reaching a record 36.14percent on Dec. 21.

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The two sides have struggled to agree on the coupon and maturityof the new bonds, which would determine losses for investors. WhileGreece and the IIF said on Jan. 21 they had made progress in talksin Athens on the debt swap, the failure to reach a deal before themeeting of EU finance ministers may disappoint investors.

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'Keeps Worsening'

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“The longer the Greek debt talks take, the more negative it is,”said Otto Dichtl, a London-based credit analyst for financialcompanies at Knight Capital Europe Ltd. “The longer it takes, themore demands the official sector makes because the situation keepsworsening in Greece.”

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Under the IIF's proposal, the new 30-year bonds would carry acoupon of about 4.25 percent, leading to a net-present-value lossof approximately 69 percent, said two people with knowledge of thetalks, who declined to be identified because the talks areprivate.

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While Greek officials have broadly sided with the IIF on thedebt deal, the EU and IMF haven't yet ratified the proposal, saidthe people. The creditors may receive a response from EU officialsas early as today, one of the people said.

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The IMF and Germany are pressing for a coupon in the 3 percentrange, the New York Times reported yesterday, citing officialsinvolved in the negotiations.

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“We are at a crossroads,” Dallara said. “Either we choose avoluntary debt restructuring. The alternative is to choose the pathof default.” He wouldn't comment on the coupon on the new bonds,saying he was “confident” the offer delivered to Prime MinisterLucas Papademos in Athens on Jan. 20 was “the maximum offerconsistent with a voluntary PSI deal.”

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Finance Minister Evangelos Venizelos said today Greece is readyto complete the debt swap on time.

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“We have a very constructive cooperation with the privatesector,” Venizelos told reporters today in Brussels before ameeting with his counterparts in the euro area. “We are ready tofinalize the procedure on time.”

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Dallara and Jean Lemierre, a special adviser to the chairman ofBNP Paribas SA and co-chairman of the creditors' steering committeenegotiating with Greece, left Athens on Jan. 21, though theyremained available for telephone talks with the Greek government'sleadership, IIF spokesman Frank Vogl said.

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Debt Relief

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Questions remain over how the two sides can craft a voluntarydeal that will provide the debt relief the Greek governmentrequires while attracting enough participation from bondholders.After two years of wage cuts and tax increases, the Greek economywas expected to shrink about 6 percent last year, according to thelatest IMF estimates, compared with a forecast of 3.8 percent madein June.

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The government has said it might pass legislation that wouldcompel full participation from private creditors, a decision thatwould undercut the voluntary nature of any swap.

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Venizelos said on Jan. 19 that for the final deal to lead to asustainable level of debt for the country there must be a 100percent participation rate.

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Hedge funds holding Greek bonds may resist the deal, seekinggreater profit by getting paid in full, either by the Greekgovernment or by triggering payouts from insurance contracts knownas credit-default swaps. Vega Asset Management LLC resigned fromthe committee of creditors negotiating the swap last month becausethe Madrid-based hedge fund refused to accept a net present valueloss exceeding 50 percent, according to a Dec. 7 e-mail sent toother panel members, which was obtained by Bloomberg News.

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The creditors' steering committee negotiating the debt swapincludes representatives from banks and insurers with the largestholdings of Greek government bonds, including National Bank ofGreece SA, BNP Paribas, Commerzbank AG, Deutsche Bank AG, IntesaSanpaolo SpA, ING Groep NV, Allianz SE and Axa SA.

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Financial firms on the IIF's private-creditor investorcommittee, a larger group of 32 members that includes the smallersteering committee, hold more than 47 billion euros in Greeksovereign debt, according to data compiled by Bloomberg fromcompany reports.

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Bloomberg News

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