Greece Edges Towards Debt Deal With Lower Yield

ATHENS — Talks between Greece and its private sector creditors over a EUR100 billion debt write-down edged towards an agreement, with bond holders seemingly willing to accept lower yields on their future holdings of Greek debt, a source close to the talks said Friday.

According to the source, the two sides were discussing a deal that would see Greece pay an “average coupon below 4%” on newly issued Greek debt, with the talks centering around an average yield of around 3.7-3.8%.

That is below what Greece’s private sector creditors–led by the Washington-based Institute of International Finance–has previously indicated it was willing to accept, but comes closer to what Greece’s official creditors have been demanding.

However, the source said the IIF is also asking for higher returns on those new bonds when Greece’s economy returns to growth–reviving a proposal previously floated in the discussions.

Talks between the two sides are due to continue Friday in the Greek capital after a two-and-a-half-hour meeting Thursday between IIF head Charles Dallara and Greek Prime Minister Lucas Papademos and Finance Minister Evangelos Venizelos.

According to a statement issued by the creditors, “some progress was realized” after that first day of meetings Thursday but no deal had yet been clinched.

In October, the IIF, a lobby group representing more than 400 of the world’s major banks, agreed to a “voluntary” 50% write-down in the value of Greek bonds that would be conducted through a distressed debt exchange swapping old Greek government bonds with new ones.

The bond deal is a precondition for a broader EUR130 billion bailout promised to Greece by its European partners and the International Monetary Fund at a European summit in October. Without private-sector agreement, the governments won’t contribute their share to the package.

However, the talks have repeatedly stumbled amid differences over the interest rate the new bonds would pay. Germany and the IMF have pushed creditors to accept an interest rate below 3.5%, while the creditors have indicated that 4% was the minimum they could accept under a voluntary deal.

At issue is Greece’s deteriorating debt dynamics. The goal of the October agreement was to cut the country’s debt ratio to no more than 120% of gross domestic product by 2020 from more than 160% currently.

But since then, a deeper-than-expected recession and a budget deficit that has widened to nearly 10% of GDP has cast doubt on those projections. A new debt sustainability study, due for release by the European Union and the IMF once talks with the private creditors are completed, might require a rethink on the funding Greece will need to be able to service its debt for the rest of the decade.

The IMF and the stronger euro-zone countries are reluctant to permit high coupons, partly because they would have to lend Greece the money to pay them but also because high interest burdens make it less likely the country can get its debt under control.

That leaves two options: pressure private-sector bond holders to accept more losses, or accept that other euro-zone countries and the IMF will have to kick in more support.

With private-sector talks already difficult, suggestions are growing that any additional burden would have to be taken up by euro-zone governments, while there have also been growing calls for the European Central Bank to take part–directly or indirectly–in the debt write-down.

In the past two days, IMF Managing Director Christine Lagarde and European Union Economics Commissioner Olli Rehn have both said that Greece’s public creditors may have to take a hit on their loans if private lenders can’t agree on a restructuring plan that goes far enough to make the country’s debt sustainable.

On Thursday, Jean-Claude Juncker, chairman of the college of eurozone finance ministers, suggested the ECB should consider playing a role, something the bank has resisted. Many ECB officials view losses on their Greek holdings as a violation of the central bank’s statutes, which forbid it from financing governments.

Juncker also acknowledged earlier this week that the Greek debt-reduction program is “off track.” Just how far won’t be known until the new debt assessment is released. This won’t happen until after an EU summit Monday, German officials say. People familiar with the talks estimate that Greece’s deteriorating fiscal position could now require an additional EUR20 billion to put the country on a sustainable footing.

-By Costas Paris and Alkman Granitsas, Dow Jones Newswires; +30 210 331 2881; alkman.granitsas@dowjones.com

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