Greece and creditors set to miss deadline for bailout contribution

Mon, Jan 23, 2012, 00:00

GREECE AND its international creditors are set to miss a key deadline for a deal on a €100 billion private sector contribution to the country’s second bailout, complicating Europe’s effort to seize control over the debt emergency.

Euro zone finance ministers had hoped for a breakthrough before they gather this afternoon for two days of talks on the crisis, their first big meeting of the year. However, Greece and its investors remain deadlocked over the actual loss that bondholders will incur and its impact on the country’s national debt.

The ministers’ talks in Brussels come as the Government defends its decision to pay €1.25 billion to senior unsecured bondholders in the former Anglo Irish Bank on Wednesday.

On RTÉ television last night, Minister for Transport Leo Varadkar said any default would lead to higher borrowing costs for the State, companies such as the ESB and Bord Gáis and State-backed banks. Asked about pressure from the European Central Bank, Mr Varadkar said the bank and other members of the EU-IMF troika told the Government “it’s on your head” if it did not pay the money.

“We don’t want you to default on these payments, it is your decision ultimately. But a bomb will go off, a bomb will go off in Dublin, not in Frankfurt, because of the reasons I’ve outlined,” the Minister said in reference to the ECB’s remarks.

The Greek talks are under close observation throughout the euro zone, with Germany, Finland and the Netherlands active behind the scenes.

Although Greece and its creditors insist a deal is within reach, officials say the situation is increasingly urgent given the ongoing deterioration in Greece’s debt profile and the risk of an uncontrolled default if the talks fail.

Following the abrupt departure of bank negotiators from Athens over the weekend, a senior euro zone source last night said there may be no deal for some days to come.

With the EU authorities insistent on clear terms for private sector involvement before they agree a second EU-IMF rescue package, the source said it may now fall to EU leaders to advance the plan at a summit in Brussels next Monday.

The leaders had hoped to avoid that prospect as they are also trying to settle terms for a new international treaty to toughen the enforcement of EU budget rules. The ministers aim to achieve progress tonight on that front.

At issue in the Greek talks is the rate of interest on new Greek bonds which will replace existing bonds under a debt-swap arrangements.

Banks represented by the Institute of International Finance lobby group have offered to accept 3.5 per cent initially, rising incrementally every two years to 5 per cent by 2020.

Germany and Finland are resisting, concerned that the proposal may not cut the Greek national debt to 120 per cent of GDP as sought by the IMF.

When IIF managing director Charles Dallara and his colleague Jean Lemierre left Athens for Paris on Saturday, the lobby insisted they both “had long-standing personal appointments outside of Greece”.