Greece hopes for debt swap deal by end of week

By Nicholas Paphitis and Gabriele Steinhauser

Associated Press

Published: Wednesday, Jan. 25 2012 8:23 p.m. MST

Protesters demonstrate Wednesday outside the hotel where international debt inspectors are staying in Athens.

Associated Press

ATHENS — Greece is aiming to complete negotiations on its debt swap deal by the end of the week, the government's spokesman said Wednesday, adding that the talks were at their "most delicate phase."

Charles Dallara, head of the Institute of International Finance — the body representing banks and other investment firms that hold a large part of Greece's debt — will head back to Athens today for the negotiations on a bond swap, known as the Private Sector Involvement.

"The target is to conclude the PSI agreement even within this week," government spokesman Pantelis Kapsis told reporters in Athens.

The duration of Dallara's stay in Athens "will depend very much on the outcome of the negotiations," IIF spokeswoman Emily Vogl said.

An IIF statement added: "The goal is to agree on all outstanding legal and technical issues as soon as possible."

On the front line of Europe's sovereign debt crisis, Athens is trying to get its private creditors to swap their Greek government bonds for new ones with half their face value, thereby slicing some $130 billion off its debt. The new bonds would also push the repayment deadlines 20 to 30 years into the future.

However, the main stumbling block over the past few weeks to securing this deal has been the interest rate these new lower-value, longer-term bonds would carry. A high interest rate could buffer losses for investors, but would also require the eurozone and the International Monetary Fund to put up more than $169 billion in rescue loans they promised in October.

"The offer that is now on the table is the maximum acceptable for a voluntary deal. All the elements are now in place," said BNP Paribas chief executive Baudouin Prot, speaking on the sidelines of the annual World Economic Forum meetings in Davos, Switzerland.

"I hope the discussion in the next few days will enable all parties to reach a constructive agreement."

IMF spokesman William Murray said "to ensure debt sustainability for Greece, it is essential that a new program be supported by a combination of private sector involvement and official sector support that will bring debt to 120 percent of GDP by 2020."

The bond swap is crucial to bring Greece's debt back to a sustainable level. The Eurozone and IMF say a higher interest rate would prevent Greece's debt from falling to 120 percent of gross domestic product by 2020 — the maximum level they see as sustainable. Without the debt swap, Greece's debt would approach 200 percent of GDP by the end of this year.

"We are at the moment at perhaps the most delicate phase of the negotiations on completing the PSI, and also in formulating the new program for the stabilization of the economy," Kapsis added.

"It is obvious that what happens in the coming days ... will affect the course of the country in coming years," he added.

Key members of the IIF met in Paris Wednesday to discuss the PSI agreement after the EU toughened its demands, a person close to the investors said. The so-called committee gathered for an "important meeting ... to really take stock" of the talks, the person said on condition of anonymity because of the sensitivity of the issue.

Eurozone finance ministers decided this week to cap the average interest rate on those new bonds at well below 4 percent. In their last offer, the bondholders said the average interest rate should be above 4 percent.

The finance ministers are pushing for a lower rate because whatever debt relief Greece doesn't get from the investors will have to come from them and the International Monetary Fund, the country's bailout rescuers.

The person close to the private bondholders said the meeting was called for Wednesday because some eurozone officials wanted the deal to be ready for a summit of EU leaders on Monday.

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Gabriele Steinhauser reported from Brussels. Niko Price in Davos, Switzerland contributed.

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