Greek debt swap faces ‘critical’ phase in talks

The Greek government and its creditors return to the negotiating table this week to revive stalled talks on a debt swap as German Chancellor Angela Merkel places pressure on both sides to forge a deal.

Greek Finance Minister Evangelos Venizelos said two days ago that talks with the Institute of International Finance will resume on Jan. 18. The Washington-based IIF, which represents banks holding the bonds, said on Jan. 14 there is a ?tentative plan? to return to Athens mid-week, ?but this depends on developments over the next few days.?

European officials and the nation?s creditors agreed in October to implement a 50 percent cut in the face value of Greek debt by voluntarily exchanging outstanding bonds for new securities, with a goal of reducing Greece?s borrowings to 120 percent of gross domestic product by 2020. The two sides, which broke off negotiations on Jan. 13, have struggled to reach an accord on the coupon and maturity of the new bonds to determine losses for investors, raising the danger of a sovereign default.

?With every day that passes, the situation becomes more critical,? said Christian Muschick, a Frankfurt-based analyst at Silvia Quandt Research. ?Financial markets want to see a solution once and for all. Politicians should put pressure on both sides.?

Greece is seeking to reach the framework for a deal this week, when talks on terms for a second financing agreement with European Union and International Monetary Fund officials start in Athens. Venizelos said Jan. 14 his country aims to present the outline of the plan at a meeting of euro-area finance ministers on Jan. 23.

The government in Athens intends to announce the details of the private-sector involvement, or PSI, between Feb. 6 and Feb. 10, according to an e-mailed transcript of a speech sent by the ministry. A deal on the swap must be struck well before March 20, when Greece has to make a 14.5 billion-euro ($18.4 billion) bond payment.

The IIF?s Charles Dallara and Jean Lemierre, co-heads of a steering committee representing financial firms, may return to Athens in the middle of the week if there is a ?constructive and consistent response by all official parties,? the group said over the weekend. The signal that talks would resume came a day after the IIF announced that negotiations had ?paused for reflection on the benefits of a voluntary approach.?

Merkel urged the Greek government on Jan. 15 to make good on debt-cutting commitments and financial firms to uphold their pledges of a debt writedown made in October. There is ?the expectation that Greece implements the measures it has accepted,? Merkel said Sunday in an interview with German radio station Deutschlandfunk. She also urged the IIF to ?keep to its commitments.?

German Foreign Minister Guido Westerwelle traveled to Athens Sunday to meet with Greek Prime Minister Lucas Papademos, Foreign Affairs Minister Stavros Dimas and Antonis Samaras, head of the main opposition New Democracy Party.

?We believe the talks will end in success, because that?s what logic and interests demand,? Dimas told reporters after meeting with Westerwelle.

The IMF had previously sought a lower coupon than the range offered by investors to ensure Greece meets the deficit targets amid a worsening economic outlook. Failure to complete the voluntary swap threatens to further undermine confidence in the EU?s crisis leadership.

European governments have been pushing for the Greek debt to carry a coupon of 4 percent, said a person with direct knowledge of the negotiations on Jan. 13. Private bondholders said they would accept those terms for a period of time if they were able to get a bigger payout later as Greece?s economy recovered, said the person, who declined to be identified. The IMF probably sought a coupon close to 2 percent for the Greek debt swap, Le Figaro reported on Jan. 14.

The steering committee includes representatives from banks and insurers with the largest holdings of Greek government bonds, including National Bank of Greece SA (ETE), BNP Paribas (BNP) SA, Commerzbank AG (CBK), Deutsche Bank AG (DBK), Intesa Sanpaolo SpA (ISP), ING Groep NV (INGA), Allianz SE (ALV) and Axa SA. (CS) Lemierre is a senior adviser to the chairman at Paris-based BNP and Deutsche Bank Chief Executive Officer Josef Ackermann is chairman of the IIF.

Financial firms on the IIF?s private-creditor investor committee, a larger group of 32 members that includes the smaller steering committee, hold more than 47 billion euros in Greek sovereign debt, according to data compiled by Bloomberg from company reports.

Hedge funds holding Greek bonds may resist the deal, seeking to reap greater profit by getting paid in full, either by the Greek government or by triggering payouts from bond insurance contracts known as credit-default swaps. Winning support from banks seeking to limit their losses will be easier than including hedge funds and other speculators who bought securities at distressed levels. For example, investors who purchased Greek bonds at 35 cents or 40 cents on the euro will want an agreement that allows them to profit from the swap.

For that reason, the final deal may have to incorporate a net-present-value loss of less than 60 percent to gain the participation needed to avert default and a series of lengthy legal battles, people familiar with the talks have said.

?If the NPV loss approaches levels as high as 75 percent, then some of the bondholders will have to rethink whether this deal makes business sense,? said Muschick of Silvia Quandt Research. ?There?s also concern that if Greece gets too sweet a deal, it could encourage other euro-zone countries to seek debt relief.?

Vega Asset Management LLC resigned from the committee of Greek creditors negotiating the debt swap last month because the Madrid-based hedge fund refused to accept a net present value loss exceeding 50 percent, according to a Dec. 7 e-mail sent to other panel members, which was obtained by Bloomberg News.

EU officials have emphasized that Greece?s circumstances are unique and don?t presage bondholder losses in other nations that seek assistance. The swap proposed to investors is intended to slice 100 billion euros from the 205 billion euros of privately owned Greek debt, though the final amount depends on participation levels. The new bonds will be backed by 30 billion euros of incentives, in the form of high-quality collateral issued by the euro area?s rescue fund.

?The sticking point is actually coming down to what the interest rate would be on the new bond,? Hans Humes, president of Greylock Capital Management LLC and a member of committee negotiating the deal with the government, said on Jan. 13 in an interview on Bloomberg Television?s ?InBusiness with Margaret Brennan.? If the talks fail and Greece defaults, ?there will be a lot of contagion,? he said.

Greece hasn?t yet decided whether to submit legislation that could force holders of the nation?s debt to take part in a bond swap, according to a government spokesman who said his earlier remarks on the matter were misinterpreted.

A report in Ta Nea newspaper on Jan. 13 said Venizelos may submit legislation on so-called collective action clauses by Jan. 16. ?There is no decision on if and when,? Pantelis Kapsis said by telephone. [Bloomberg]

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