Dallara, managing director of the Washington-based Institute of International Finance, said he’s hopeful the EU and IMF will agree to terms for private investor involvement in a rescue of Greece to avert a default and collapse of the economy. He declined to elaborate on the terms discussed in talks that resumed Jan. 18 and remained inconclusive as EU finance ministers prepared to meet in Brussels today.
“The elements now are in place for an historical voluntary PSI deal,” Dallara said in comments on Athens-based Antenna TV, televised yesterday. “It is a question now, really, of the broader reaction of the European official sector and, of course, of the IMF to this proposal.”
European officials and the nation’s private bondholders agreed in October to implement a 50 percent cut in the face value of more than 200 billion euros ($258 billion) of Greek debt by voluntarily exchanging outstanding bonds for new securities, with a goal of reducing Greece’s borrowings to 120 percent of gross domestic product by 2020. The accord is key to a second financing package for the cash-strapped country, which faces a 14.5 billion-euro bond payment on March 20.
‘Worsening’ Situation
The two sides have struggled to agree on the coupon and maturity of the new bonds, which would determine losses for investors. While Greece and the IIF said on Jan. 21 they had made progress in talks in Athens on the debt swap, the failure to reach a deal before the meeting of EU finance ministers may disappoint investors.
“The longer the Greek debt talks take, the more negative it is,” said Otto Dichtl, a London-based credit analyst for financial companies at Knight Capital Europe Ltd. “The longer it takes, the more demands the official sector makes because the situation keeps worsening in Greece.”
After two years of wage cuts and tax increases, the Greek economy was expected to shrink about 6 percent last year, according to the latest IMF estimates, compared with an forecast of 3.8 percent made in June.
Dallara wouldn’t comment in the TV interview on reports the creditors proposed an average interest rate of about 4 percent on the new bonds, saying he was “confident” the offer delivered to Prime Minister Lucas Papademos in Athens on Jan. 20 was “the maximum offer consistent with a voluntary PSI deal.”
‘At Crossroads’
The parties were nearing an agreement under which old bonds would be swapped for new securities with coupons averaging between 4 percent and 4.5 percent, said a person with knowledge of the discussions three days ago. The New York Times, citing officials involved in the negotiations, reported yesterday that the IMF and Germany are pushing for a coupon in the low 3 percent range.
“We are at a crossroads,” Dallara said. “Either we choose a voluntary debt restructuring; the alternative is to choose the path of default.”
Dallara and Jean Lemierre, a special adviser to the chairman of BNP Paribas (BNP) SA and co-chair of the creditors’ steering committee negotiating with Greece, left Athens on Jan. 21, though they remained available for telephone discussions with the Greek government’s leadership, IIF spokesman Frank Vogl said.
Full Participation
Questions remain over how the two sides can craft a voluntary deal that will provide the debt relief the Greek government requires while attracting enough participation from bondholders.
The government has said it might pass legislation that would compel full participation from private creditors, a decision that would undercut the voluntary nature of any swap.
Greek Finance Minister Evangelos Venizelos said on Jan. 19 that for the final deal to lead to a sustainable level of debt for the country there must be a 100 percent participation rate.
Hedge funds holding Greek bonds may resist the deal, seeking greater profit by getting paid in full, either by the Greek government or by triggering payouts from insurance contracts known as credit-default swaps. Vega Asset Management LLC resigned from the committee of creditors negotiating the swap last month because the Madrid-based hedge fund refused to accept a net present value loss exceeding 50 percent, according to a Dec. 7 e-mail sent to other panel members, which was obtained by Bloomberg News.
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 (INGA), 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.
To contact the reporters on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net; Natalie Weeks in Athens at nweeks2@bloomberg.net
To contact the editors responsible for this story: Stephen Foxwell at sfoxwell@bloomberg.net; Jerrold Colten at jcolten@bloomberg.net
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