While considerable progress has been made, Greece’s financial backers — Germany and the International Monetary Fund — have been unyielding in their insistence that the longer-term bonds that would replace the current securities must carry yields in the low 3 percent range, officials involved in the negotiations said on Sunday.
Bankers and government officials say they still expect a deal to be done; Greece and its private sector creditors on Friday appeared close to a deal that would bring the yield to below 4 percent. But the continuing disagreement over the interest rate is a reminder of just how complex and politically tricky it is to restructure the debt of a euro zone economy.
A debt restructuring agreement is a precondition for Greece to receive its next installment of aid from Europe and the monetary fund, 30 billion euros that the country needs to stave off bankruptcy.
European Union finance ministers were to resume talks Monday on solutions to the region’s debt crisis.
Greece’s private creditors, which hold about 206 billion euros, or $265 billion, in Greek bonds, are resisting accepting a lower rate. They argue that they are already faced with a 50 percent loss on their existing bonds and that the lower rate would increase the hit they would take.
It would also make it more difficult to describe the deal as voluntary. A coercive deal, bankers warned, could lead to a technical default and the initiation of credit-default swaps, or insurance, an outcome that all sides were trying to avoid.
The bonds’ rate “is the only issue,” said a senior official directly involved in the negotiations. “We have to accommodate the needs of the Greek economy.”
Talks broke off over the weekend when Charles H. Dallara, the managing director of the Institute of International Finance, a bankers group that is representing private sector bondholders, left Athens. In a statement, a spokesman for the group said that Mr. Dallara had a previously planned personal engagement in Paris and that progress was being made toward securing an agreement.
During an interview broadcast Sunday on the Greek television channel Antenna, Mr. Dallara emphasized that creditors were insisting on 3.8 percent to 4 percent. “This is certainly the maximum offer that is consistent with the voluntary debt exchange,” he said. “It is largely in the hands of the official sector to choose the path — a voluntary debt exchange or a default.”
With the Greek economy forecast to shrink by 6 percent this year and 3 percent next year, the ultimate goal of Greece’s lowering debt to 120 percent of gross domestic product by 2020 is seeming more and more unrealistic. With G.D.P. plummeting, the International Monetary Fund is insisting that Greece’s debt load — currently 160 percent of G.D.P. — be reduced more quickly and that the private sector pay its fair share.
Bankers say that the fund has been demanding a coupon rate of less than 3.5 percent for bonds maturing by 2014. Over subsequent years, the rate would rise to 4 percent and above as the economy improved.
A majority of the funds the monetary fund has disbursed so far has been paid out to Greece’s bondholders as opposed to helping Greece itself. Of the close to 20 billion euros that the fund has disbursed, two-thirds has gone to repay bondholders — an increasing number of which have been hedge funds betting that this trend will continue.
Persuading Greece and its bankers to agree on a deal to restructure 200 billion euros in debt was never going to be easy, given the many different constituencies involved. And bankers say a number of other important technical issues must also be settled, including what kind of collateral would back the new bonds and how long their maturities would be.
Also holding up discussions was the question of what to do about the European Central Bank’s 55 billion euros in Greek bonds. The bank’s refusal to take a loss has been regularly cited by investors as unfair, and many have said that they will sue Greece if they have to take a loss while the bank does not.
To get around this, officials are now discussing the possibility that Europe’s rescue fund might lend money to Greece to allow it to buy the bonds back from the European Central Bank at the price the bank paid for them — thought to be about 75 cents on the euro. The central bank would then not have to take a loss on these holdings. By selling them back to Greece, it would remove itself as an obstacle to a broad restructuring agreement.
“Both sides know that a deal has to get done,” said a banker who asked not to be identified because he was closely involved in the talks. “But they have to dance this dance to get there.”
Separately, the German magazine Der Spiegel reported that the Italian prime minister, Mario Monti, was pushing for an increase in the European bailout fund to 1 trillion euros, or $1.29 trillion. That would be more than double the amount that the European Financial Stability Facility is authorized to lend to troubled euro zone countries.
A German government official, who was not authorized to be quoted by name, said Sunday that Germany had received no formal request from Italy to increase the fund. In any case, he said, Germany would be opposed to an increase now.
Germany’s position remains that the way to reduce borrowing costs is for euro zone countries to take steps to reduce debt and remove impediments to economic growth. Recent declines in borrowing costs for Spain and Italy show this is the most effective policy, the German official said.
“We don’t see the need for additional funds,” he said. “It’s not the way to reduce financing costs. You need to do the reforms.”
A spokeswoman for the Italian government had no official comment on the Spiegel report. Mr. Monti has been on record in recent weeks calling on Europe to increase the “firewall” of bailout money available to lend to vulnerable economies.
Jack Ewing contributed reporting from Berlin. Niki Kitsantonis and Rachel Donadio contributed from Athens.
Article source: http://www.nytimes.com/2012/01/23/business/global/greek-talks-stumble-over-interest-rates.html?partner=rss&emc=rss
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