Greek Debt Talks to Resume as Policy Makers Squabble

By Nicholas Comfort and Sonia Sirletti – Jan 26, 2012

Talks on a debt swap to avert a Greek default resume today as international policy makers squabble over the mounting cost of the rescue.

Charles Dallara and Jean Lemierre, negotiating on behalf of private creditors, return to Athens after European finance ministers insisted bondholders take bigger losses on their Greek debt. The International Monetary Fund further roiled the discussions by suggesting that public holders of Greek bonds might also have to increase support.

The parties are groping for a solution three months after private bondholders agreed with European officials to implement a 50 percent cut in the face value of more than 200 billion euros ($262 billion) of debt by voluntarily swapping bonds for new securities. Since then, an economic contraction that exceeded estimates has made the goal of cutting Greece’s debt to 120 percent of gross domestic product by 2020 harder. An accord is tied to a second bailout for the country, which faces a 14.5 billion-euro bond payment on March 20.

“The cost of postponing a solution is extremely high for Europe, but especially for the future of the euro,” said Giovanni Bossi, chief executive officer of Banca Ifis SpA, an Italian financial-services company that doesn’t own Greek debt. “The parties are very close to a deal. It’s time to close.”

Bonds from Germany, France and Italy rose today and the euro was little changed near a one-month high. The currency traded at $1.3107 at 10:45 a.m. in Athens.

‘Always Tensions’

“There are always tensions and a tug of war in these areas,” Irish Prime Minister Enda Kenny told Bloomberg Television late yesterday in Davos, Switzerland, when asked about the struggles over the swap. “The end result of all this should be strong leadership, decisiveness from a European perspective, a focus on growth and jobs, which can grow the economies of Europe and can have the European market achieve the full potential of the single market.”

Dallara, the managing director of the Washington-based Institute of International Finance, said on Jan. 24 that all parties, public and private, should contribute to cutting Greece’s debt. Private investors hold only about 60 percent of Greece’s 350 billion euros of debt, he said. The IIF is an industry group with more than 450 members.

He’ll meet Greek Prime Minister Lucas Papademos at 8 p.m., the state-run Athens News Agency reported.

Bigger Losses

The latest offer from the private bondholders would lead to a loss of about 69 percent on the net-present value of Greek bonds, two people with knowledge of the talks said on Jan. 23. The new 30-year bonds would carry an average coupon of about 4.25 percent, said the people, who declined to be identified because the talks are private.

European finance ministers meeting in Brussels signaled they would push Greece’s private investors to accept bigger losses, with coupons below 3.5 percent for debt to be serviced until 2020 and below 4 percent over the 30 years of the next Greek package.

“What we’re seeing is haggling over the details and it will go on until the last minute,” said Christian Muschick, a banking analyst at Silvia Quandt Research GmbH in Frankfurt.

Baudouin Prot, the chairman of BNP Paribas SA, said the offer from bondholders is the “maximum acceptable for a voluntary deal.”

“All the elements are now in place,” Prot said at the World Economic Forum in Davos, Switzerland, yesterday. “I hope the discussion in the next few days will enable all parties to reach a constructive agreement.”

IMF Versus ECB

Christine Lagarde, a former French finance minister who is the IMF’s managing director, said that European governments and other public holders of Greek debt may have to increase support if private creditors don’t go far enough.

Michael Meister, the deputy floor leader for German Chancellor Angela Merkel’s Christian Democrats and the party’s ranking finance spokesman, rejected suggestions that the European Central Bank take losses on its Greek debt holdings.

“I can’t imagine that European politicians would allow third parties to make such an indecent claim on our central bank,” said Meister in an interview yesterday.

While the ECB faces pressure to join private-sector investors in accepting losses on Greek debt, the central bank sees any participation as risking damaging confidence in the institution, two people familiar with the Governing Council’s stance said. The debt was acquired for monetary policy purposes and the ECB is firmly opposed to any restructuring, they said on condition of anonymity because the matter is confidential.

‘Good Idea’

Angel Gurria, secretary general of the Organization for Economic Cooperation and Development, said it would be a “good idea” for the ECB to accept losses on Greek bonds.

“We always proposed this should be done and it will also help create an atmosphere of equal treatment,” he said in a Bloomberg Television interview yesterday. “The ECB bought these bonds at a discount and I think at least this discount could be accrued in favor of Greece.”

ECB President Mario Draghi said on Jan. 19 that the ECB is “not party” to discussions between the Greek government and the private sector. The ECB is in talks regarding a potential swap of its Greek bonds that would ease the country’s debt load and avoid losses at the central bank, the New York Times reported yesterday, citing unnamed officials.

An ECB spokesman declined to comment.

Back to Athens

Meister urged private creditors to reach a deal, saying that it is “in the interest of private holders of Greek bonds to accept the terms of a writedown.”

After a meeting of the creditors’ steering committee yesterday in Paris, Greek bondholders said they would send a team of experts to Athens to continue negotiations with the Greek government on the debt swap, with the goal of agreeing on all outstanding legal and technical issues as soon as possible.

Dallara and Lemierre, who is also a senior adviser to the chairman of BNP Paribas SA, will return to Athens today for “informal discussions,” according to an e-mailed statement.

Losses on sovereign bonds by Greece’s creditors won’t enable the country to get a handle on its debt, according to the Kiel Institute for the World Economy. Greece’s debt load will be “unbearably high” even if public creditors join investors in taking 50 percent writedowns, the institute, which advises the German government, said in a study published on its website.

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

Financial firms on the IIF’s private-creditor investor committee, a larger group of 32 members 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.