Stalling of Greek debt talks raises spectre of default

TALKS OVER Greece’s debt restructuring broke down yesterday, making it more likely Athens will become the first government of a developed country in more than 60 years to suffer a full-scale default on its debt.

In a statement, lead negotiators for Greek bondholders said the latest offer by Athens “has not produced a constructive consolidated response” from “all parties”, a clear reference to a tough stance taken by some international lenders that private investors must shoulder even more losses.

The International Monetary Fund in particular has concluded that bondholder losses must be increased significantly or a second Greek bailout would have to be more than the €130 billion agreed last month.

“Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach,” said the statement, issued by Charles Dallara, managing director of the International Institute for Finance, and Jean Lemierre of BNP Paribas.

“We very much hope, however, that Greece, with the support of the euro area, will be in a position to re-engage constructively with the private sector,” the two said.

The announcement comes perilously close to putting at risk a €14.4 billion bond repayment due from Athens in March.

Although the redemption is still weeks away, government negotiators had hoped the restructuring would be in place so Greece would not have to repay the entire sum.

Unless the restructuring terms are completed in days, the deal is unlikely to be finalised in time and international lenders would have to quickly shell out billions of euro in additional aid – or Athens would default on the payment.

In an interview with the Financial Timesyesterday, Greek finance minister Evangelos Venizelos said talks would resume in Athens on Wednesday. He dismissed suggestions his government was headed for a disorderly default. "I am certain we can bridge the differences," he said in his first newspaper interview since taking over the ministry in June.

In October, Mr Dallara and European officials agreed to a deal whereby current holders of Greek debt would trade in their bonds for new ones worth half the value. But details of the deal were left open, including annual interest payments on the new bonds, which can change their long-term value drastically.

Some government negotiators have been pushing for low interest rates that would make the new bonds worth even less than the 50 per cent “haircut” in the bonds’ face value, a tactic that has led to a revolt among some hedge funds involved in the talks and put at risk attempts to make the deal voluntary among all private Greek bondholders.

IMF officials say they have not taken a stance on the required bond writedown, merely that any shortfall in reaching the near-universal participation of private bondholders must be made up with official finance. The IMF’s latest Greek assessment said Greek debt could be brought down to 120 per cent of gross domestic product by 2020 – the target agreed by euro zone leaders in October – through tough austerity and economic deregulation measures. But it warned: “A key assumption underpinning the sustainability result is that the operation achieves a near-universal participation rate.”

Since then, data for Greek growth and public finances have been worse than expected, suggesting greater bailout support is required. In addition, Mr Venizelos said Greece would need €40 billion to recapitalise its teetering banking sector, which could force European and IMF lenders to increase the bailout even further. – (Copyright The Financial Times Limited 2012)