EU ministers push bondholders in Greek deal

By Toby Sterling

Associated Press

Published: Monday, Jan. 23 2012 11:25 a.m. MST

Greek Finance Minister Evangelos Venizelos, left, speaks with Luxembourg's Prime Minister and head of the eurogroup Jean-Claude Juncker during a meeting of EU finance ministers in Brussels on Monday, Jan. 23, 2012. European finance ministers will try on Monday to give new momentum to talks on a Greek debt relief deal that is crucial to avoid a default, but a European diplomat warned that a final agreement may have to wait until a leaders' summit next week.

Virginia Mayo, Associated Press

BRUSSELS — European finance ministers piled the pressure on Greece's private creditors Monday to reach an agreement with Athens to cut the country's massive debt load, with the Dutch representative warning bondholders that they may be forced to take losses.

Time is running out for Greece to reduce its debt by some €100 billion ($129 billion) and avoid missing a vital bond repayment deadline. Talks between the country and representatives of banks and other investment firms to secure a deal hit an impasse over the weekend.

The deal would involve private creditors swapping their old Greek bonds for ones with a 50 percent lower face value. The new, lower priced bonds, would also have much longer maturities — pushing repayments decades into the future — and will pay a much lower interest rate than Greece would currently have to pay on the market.

It's clear that Greece needs some form of deal soon — it faces a €14.5 billion ($19 billion) bond repayment on March 20, which it will be unable to afford if the bond swap doesn't go through.

The Greek government and representatives for the private creditors said they are moving closer to a final deal. But any agreement also has to be signed off by the other 16 countries that also use the euro as their currency and the International Monetary Fund, who have made the deal a key condition of the country winning any further bailout loans.

Greece has been surviving on a first €110 billion ($142 billion) batch of rescue loans since May 2010, which were conditioned on deep spending cuts and sweeping public sector reforms.

At the center of the debate is the interest rate that Greece will have to pay on the new, lower-valued bonds. The interest rate is key not only to determining the overall losses for the bondholders but also to whether the deal will work.

If the interest rate is too high, a second, €130 billion ($168 billion) bailout for Greece may not be enough to put the country back on its feet. The other eurozone states and the IMF would have to provide more loans, but they are unwilling to do so.

But if they are too low, the losses for bondholders will become so high that it will be difficult to get them to agree voluntarily to a deal.

Dutch Finance Minister Jan Kees de Jager indicated that the eurozone may be moving away from its previous insistence that investors will not be forced to take losses.

"We've never pushed for a default, but we've never said it (a restructuring) must be voluntary," de Jager said as he arrived for a meeting with his eurozone counterparts in Brussels. "Our goal is a sustainable debt. It has our preference if it's voluntary, but it's not a precondition for us."

Greece needs to secure a deal quickly if it wants to avoid a disorderly default on March 20.

"Given that any debt swap deal will involve a lot of lawyers, it is estimated that around 5 weeks are needed between agreement and the bond maturing to prevent default," said Louise Cooper, markets analyst at BGC Partners. "This does not leave much wriggle room, although such pressure must focus the minds of all at the negotiating table."

A forced restructuring would likely trigger payouts on so-called credit default swaps — a contract traded between banks and other investment firms that want to insure against potential defaults. Because the market in CDS is obscure — with no clear data on who would owe whom how much — the eurozone fears that a payout could lead to turmoil on financial markets similar to what happened after the collapse of U.S. investment bank Lehman Brothers in 2008.

Although officials, including the French and Greek finance ministers, insisted that a deal was in the making, few expected a final agreement ahead of a key summit of EU leaders next Monday. De Jager suggested that negotiations may even drag on beyond that.

A Greek official said the government now hopes to make a formal offer on the bond swap to investors by Feb. 13. He declined to be named because talks are ongoing.

Greece's economic problems kicked off Europe's debt crisis more than two years ago and the continent's inability to resolve its troubles have raised concerns about other highly indebted countries. But positive bond auctions in Spain, Italy and France last week have eased some concerns about the region's bigger economies and have lifted stock markets and the value of the euro.

Ministers will also seek to put the finishing touches on their permanent bailout fund — the €500 billion European Stability Mechanism — which is scheduled to come into force this year. They will also discuss a new intergovernmental treaty designed to keep eurozone countries from overspending.

Greg Keller in Paris and Nicolas Paphitis in Athens contributed to this story.

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