Charles H. Dallara of the Institute for International Finance, the bank lobby that represents private-sector bondholders, said in a statement
that discussions had “not produced a constructive consolidated response by all parties, consistent with a voluntary exchange of Greek sovereign debt.”
While people involved in the negotiations described it as a more of a negotiating tactic than a sign that Greece was going to default, the disagreement was a reminder of how wide the gap remains between the two sides, even after months of discussions.
But the announcement, along with reports of possible downgrades of euro zone nations’ credit ratings and data showing that banks in the euro zone remain reluctant to lend to each other, helped to squelch the enthusiasm that remained in the market after relatively strong debt sales in Italy and Spain.
On Friday, the Italian Treasury sold a total of about €4.8 billion, or $6.1 billion, of debt, including €3 billion of three-year bonds priced to yield 4.83 percent, down sharply from the 5.62 percent it paid at the last auction of such securities in late December. But the bid-to-cover ratio for the three-year bonds, a measure of demand, was lukewarm at 1.2 times — below the 1.36 times at the last sale.
A day earlier, Spain sold €10 billion of bonds, twice the targeted amount, with yields falling about a full percentage point from previous auctions.
The European Central Bank began a new funding program last month to backstop banks, helping to restore a semblance of stability to the euro zone financial system and to hold down the rates governments must pay to sell debt.
Yields rise as the price of the underlying bonds falls, so the fact that yields are lower suggests that investors have more confidence in the debtor’s ability to repay its borrowings.
But another confidence gauge — the gap, or spread, between Italian and German 10-year bonds — barely budged. Rome’s long-term borrowing costs are still more than three times higher than Berlin’s.
“The tone was broadly better in the wake of the Spanish auction and a run-up in the euro,” said Charles Diebel, head of market strategy at Lloyds Banking in London. But an unexplained delay in the announcement of the Italian results, he said, as well as the continuing uncertainty over the Greek debt restructuring talks, “took the shine off things.”
Mr. Diebel said Europe’s interbank lending market, where banks finance themselves on a short-term basis, remained “broken,” even after the E.C.B. began the longer-term refinancing operations. In December, the central bank lent €489.2 billion for three years at its benchmark 1 percent interest rate.
“Unsecured lending between banks is just not happening,” he said.
That observation is backed up by E.C.B. data released Friday
which showed that banks had deposited a record €489.9 billion overnight, almost the same amount lent under the three-year program. The figure has been elevated since the loans were made.
The I.I.F.’s statement on the negotiations in Athens came at the conclusion of talks between Mr. Dallara and the Greek finance minister, Evangelos Venizelos, on Friday.
At issue, bankers and government officials say, is less the actual 50 percent write-down, or haircut, that investors would absorb with their new bonds than the coupon, or interest, these new instruments would carry.
Investors are pushing for a higher interest payout to mitigate both their loss and the fact that their exposure to Greece will be lengthened considerably with the new bonds.
The International Monetary Fund and Germany, both of which have become increasingly worried about Greece’s ability to service its debts as its economy continues to plummet, are pushing for a lower rate that would ease Greece’s debt payments and require investors to take a bigger loss on their holdings.
An I.M.F. spokeswoman said Friday that it was important that any private-sector agreement, “together with the efforts of the official sector, ensures debt sustainability.”
As foreseen, the deal is expected to bring Greece’s debt down from about 150 percent of gross domestic product, which it is now, to 120 percent of G.D.P. by 2020. But the I.M.F. in particular has become very pessimistic about Greece’s ability to recover economically and believes its debt burden must decrease at a faster rate.
Within the fund as well as in Europe, the view is that the private sector needs to pay a larger share. Europe’s banks counter that they are in no position to take on more losses.
In its statement, the I.I.F. said that “discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach.”
The not-so-subtle message is that if Europe pushes too hard on this point, then the creditors can no longer accept the agreement as a voluntary one. This is important, because an involuntary restructuring would be seen by creditors as a default and trigger credit default swaps — something Europe and Greece are trying very hard to avoid.
One person involved in the discussions said the talks would resume next Wednesday.
Article source: http://www.nytimes.com/2012/01/14/business/global/italy-pulls-off-another-strong-debt-auction.html?partner=rss&emc=rss