Greece To Continue Debt Talks With Creditors

ATHENS — Greece and its private-sector creditors agreed to meet again Friday in a race to negotiate a EUR100 billion debt write-down for the country amid concerns that Greece’s funding needs might be bigger than originally thought.

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

“Discussions here in Athens today focused on legal and technical issues on the voluntary [debt restructuring] and some progress was realized. Work will continue tomorrow,” said the statement, issued by the Institute of International Finance.

A senior Greek finance ministry official also confirmed that the talks were set to continue.

The IIF, a Washington-based lobby representing the world’s major banks, is leading the negotiations on behalf of private creditors with the Greek government on the debt restructuring.

In October, the IIF 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 part of 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 stumbled twice amid differences over the interest rate the new bonds would pay. Germany and the IMF have been pushing the 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, down from more than 160% currently.

But since then, a deeper-than-expected recession in the Greek economy and a budget deficit that has widened to nearly 10% of GDP could put those projections in doubt. 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, in part because they would have to lend Greece the money to pay them and in part because high interest burdens make it less likely the country can get its debt under control.

That leaves two options: pressure private-sector bondholders 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.

IMF Managing Director Christine Lagarde said Wednesday that Greece’s public-sector 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. The Fund said this didn’t assign a specific role to the ECB, which has rigidly opposed accepting a write-down on its Greek bond holdings. Many ECB officials would be likely to view losses on their Greek holdings as a violation of the central bank’s statutes, which forbid it from financing governments.

On Thursday, European Union Economics Commissioner Olli Rehn said public-sector lenders may have to increase their contribution to Greece’s overall debt deal. He said he was hopeful agreements could be struck soon to increase euro-zone bailout funds and IMF resources.

“I don’t rule out a small adjustment of lending needs of the euro-area member states,” he said in an interview with The Wall Street Journal, referring to the pending update in Greece’s debt-sustainability study.

Eurogroup President Jean-Claude Juncker acknowledged earlier this week that the Greek debt-reduction program “is off track.”

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

“This gap, which is around 10% of GDP, has to be covered for the second bailout loan to be approved,” said one person familiar with the situation.

Ian Talley in Washington and Stephen Fidler in Davos, Switzerland contributed to this article.

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

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