Petros Giannakouris, Associated Press
ATHENS, Greece — Tense talks between the Greek government and its private creditors on a bond swap deal needed to avoid default ran into trouble on Friday, and will resume next week, people close to the negotiations said.
The bond swap aims to reduce Greece's debt by €100 billion ($127.8 billion) and is a key part of a second, €130 billion ($166 billion) international bailout. Without it, the country could suffer a catastrophic bankruptcy that would send shockwaves through the global economy. The bailout tops a first, €110 billion program agreed in May 2010, when the country borrowing costs soared to untenable heights.
Prime Minister Lucas Papademos and Finance Minister Evangelos Venizelos met on Thursday and Friday with Charles Dallara and Jean Lemierre of the Institute of International Finance, a global banking body representing private bondholders to discuss the deal, while finance ministry officials from the eurozone met in Brussels Thursday night on the issue.
But key issues remained, leaving the negotiations to be resumed next week. A senior Greek government official said the discussion would probably continue on Wednesday, as "we must examine some details."
While the official was cautiously optimistic Thursday night and said a deal could be struck by the end of next week, it appeared key issues remained unresolved.
Another person close to the talks said the negotiations were "very, very tense." Both spoke on condition of anonymity to discuss highly sensitive negotiations.
After Thursday's meeting, the IIF warned that "some key areas remain unresolved," and stressed that "time for reaching an agreement is running short."
Greece is rushing to reach a deal on the bond swap that would reduce its privately-held debt by roughly half, ahead of a major €14.5 billion bond redemption in late March. Without the deal, and funding from the country's second bailout, the country faces a messy default.
One key aspect of the bond deal is what percentage of private bondholders are willing to sign up to it. Without voluntary participation by the creditors, the agreement could be considered a "credit event", which would trigger the payout of credit default swaps — essentially insurance against a default.
The eurozone fears that a CDS payout could causer further turbulence on financial markets and hurt banks that have sold them.
One option would be for Greece to include so-called "collective action clauses," which could force reluctant private creditors to sign up to the deal if a majority of bondholders are willing to participate.
Government spokesman Pantelis Kapsis said the country has not yet decided whether to submit such a bill to Parliament, a move that would pave the way for the collective action clauses to be included.
"There is no decision as to if and when" such a bill could be submitted, Kapsis told the Associated Press.
Another issue is whether the deal will fall under English or Greek jurisdiction — something that Kapsis said was still being negotiated.
"It is not a given that we will go under English law," he said in an interview on Athens 9.84 radio.
The talks are being complicated by the large number of actors involved in the broader bailout deal. Not only the Greeks and the IIF, but the 17 euro countries and the International Monetary Fund, who will have to fund the payments to the private creditors, also have to sign off.
One of the most contentious issues in the negotiations is the interest rate Greece will have to pay on the new, lower-value bonds, according to the people familiar with the talks. The interest rate is key to determining the cost of the second bailout for Greece's official creditors — the eurozone and the IMF.
One person briefed on the talks said there is disagreement among eurozone governments on how much interest Greece should pay, with some pushing for an interest rate as low as 3 percent. That would be very little for bonds that are paid off in 20 to 30 years' time.
Earlier, Frederic Oudea, chief executive of French bank Societe Generale, which holds a substantial amount of Greek debt, said negotiations could finish in the next few days and private creditors might end up accepting losses even larger than the target of 50 percent.
"But we have to be careful to maintain a balance because even if governments are saying that Greece will be a unique case, it will be instructive to investors," Oudea said in an interview with Les Echos newspaper published Friday. "It could become a 'cautionary tale' that could weigh on other countries."
On Sunday, German Foreign Minister Guido Westerwelle will visit Athens for talks with Greek Foreign Minister Stavros Dimas. Westerwelle is also expected to meet with Papademos.
Gabriele Steinhauser in Brussels and Sarah DiLorenzo in Paris contributed to this report.