Hannelore Foerster/Bloomberg NewsCharles Dallara, managing director of the Institute of International Finance, is representing private-sector bondholders in talks with Greece.
LONDON — Greece and its private-sector creditors inched closer to a completed deal late Thursday over how much of a loss investors should take on just over 200 billion euros in Greek government bonds
The long-running — and at times contentious talks — resumed in Athens on Wednesday between Charles Dallara of the Institute of International Finance, who represents bondholders, and the Greek political leadership, after having broken up last week because of a disagreement over the coupon rates the new Greek bonds would carry.
Now, a compromise seems to be at hand, with the Greeks close to locking in an interest rate just below 4 percent on the new bonds, according to officials involved in the negotiations. A coupon below 4 percent represents a significant breakthrough for Greece, as creditors have long pushed for a rate above 4 percent, which they say would compensate them for the 50 percent haircut they would receive on their new securities.
A lower rate, creditors have argued, would punish investors too much and could not be described as voluntary, thus setting off credit default swaps on Greek debt — an outcome that Europe fears would lead to another round of market assaults on the debt of other vulnerable countries like Portugal.
Pressured by its financial backers, Germany and the International Monetary Fund, Greece has advocated a lower rate, which would deliver more relief to the debt strapped country.
In a concession to creditors, the coupon is expected to escalate beyond 4 percent over time, linked to the growth of the Greek economy. With the economy expected to shrink by 6 percent this year and perhaps 3 percent next year, it could be a few years before the interest rates see any significant rise.
The Institute of International Finance said in a brief statement that “productive” discussions were held with Prime Minister Lucas Papademos and Finance Minister Evangelos Venizelos, progress was made and the talks would continue on Friday. No other details were offered.
A debt restructuring agreement is a precondition for Greece to receive its next tranche of aid from Europe and the I.M.F., a 30 billion euro sum that the country desperately needs to stave of bankruptcy.
The deal is also expected to shave 100 billion euros from Greece’s debt mountain, which today is about 140 percent of its gross domestic product.
While the talks in Athens on Friday could well collapse again, bankers and government officials believe that the details of the new agreement could be announced in the coming days.
Assuming all goes according to plan, investors would be offered the opportunity to exchange their old bonds for new ones carrying the agreed-upon terms in early to mid-February.
Bankers say that the creditors believe 50 to 60 percent of private sector bond holders might accept the proposal — although such a range remains a very rough estimate. The challenge for Greece and the creditor group is to persuade investors on the fence to join in the deal in order to reach a figure of about 75 percent.
With a 75 percent participation rate, Greece could well be in a position to take advantage of the collective-action clauses that are set to be attached to the Greek law bonds, forcing the terms of the agreement on all bondholders. That includes hedge funds that have said they are not going to participate in the transaction, thus preventing free riders from getting paid in full in March when Greece must pay 14.4 billion euros to bond investors.
Bankers estimate that hard-core holdouts comprise about 10 percent of the 206 billion euros that would be covered by the deal. Some of these hedge funds are looking to purse legal action against Greece, although it is unclear how many will actually follow through given the time and expense involved.
Article source: http://dealbook.nytimes.com/2012/01/19/greece-inches-toward-deal-with-bondholders/?partner=rss&emc=rss
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