Crucial Greek bond swap negotiations 'paused', appear close to collapse

A woman speaks on her phone Friday in front of a Greek bank's adverting banner with ancient coins in Athens,. ASSOCIATED PRESS Enlarge

ATHENS, Greece — Crucial negotiations between the Greek government and its private creditors on a bond swap deal needed to avoid default appeared close to collapse Friday, with representatives of the bondholders saying they had been "paused for reflection."

The deal, known as the Private Sector Involvement, or PSI, aims to reduce Greece's debt by €100 billion ($127.8 billion) by swapping private creditors' bonds with new ones with a lower value, and is a key part of a €130 billion ($166 billion) international bailout.

Without it, the country could suffer a catastrophic bankruptcy that would send shock waves through the global economy. The bailout tops a first, €110 billion program agreed in May 2010, when the country's borrowing costs soared to untenable heights.

Prime Minister Lucas Papademos and Finance Minister Evangelos Venizelos met on Thursday and Friday with Charles Dallara and Jean Lemierre of the Institute of International Finance, a global body representing the private bondholders. Finance ministry officials from the eurozone also met in Brussels Thursday night on the issue.

"Unfortunately, despite the efforts of Greece's leadership, the proposal put forward ... which involves an unprecedented 50 percent nominal reduction of Greece's sovereign bonds in private investors' hands and up to €100 billion of debt forgiveness — has not produced a constructive consolidated response by all parties, consistent with a voluntary exchange of Greek sovereign debt," the IIF said in a statement.

"Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach," it said. "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 with a view to finalizing a mutually acceptable agreement."

Discussions in Athens on Friday and during the finance ministry officials' meeting in Brussels on Thursday had been "very, very tense," one person close to the talks said.

The finance ministry officials clashed over the interest rates that the new bonds should carry, other people familiar with the talks said. Some governments had demanded an interest rate of as low as 3 percent, a very low rate for bonds that are paid off in 20 to 30 years' time, according to another source. All spoke on condition of anonymity because of the sensitive nature of the talks.

The interest rate is key to determining the cost of the second bailout for Greece's official creditors — the eurozone and the IMF. With the face-value cut and the amount of official bailout loans already defined, the interest rate is one of the few variables through which private bondholders can limit their losses.

Just after Friday's meetings ended, a senior Greek government official — who likewise spoke on condition of anonymity because of the confidential nature of the negotiations — said the talks would likely resume next week, possibly on Wednesday. IIF spokesman Frank Vogl said that would depend on developments over the coming days.

The IMF, for its part, said it "looks forward to the resumption of talks between Greece and its creditors."

"It is important that this leads to a PSI agreement that, together with the efforts of the official sector, ensures debt sustainability," the IMF said in a statement.

Greece is rushing to reach a deal on the bond swap that would reduce its privately-held debt by roughly half, ahead of a major €14.5 billion bond redemption in late March. Without the deal, and funding from the country's second bailout, the country faces a messy default.

The talks are being complicated by the large number of actors involved in the broader bailout deal. Not only the Greeks and the IIF, but the 17 euro countries and the International Monetary Fund also have to sign off.

One key aspect of the bond deal is what percentage of private bondholders are willing to sign up to it. Without voluntary participation by the creditors, the agreement could be considered a "credit event", which would trigger the payout of credit default swaps — essentially insurance against a default.

The eurozone fears that a CDS payout could causer further turbulence on financial markets and hurt banks that have sold them.

One option would be for Greece to include so-called "collective action clauses," which could force reluctant private creditors to sign up to the deal if a majority of bondholders are willing to participate.

Government spokesman Pantelis Kapsis said the country has not yet decided whether to submit such a bill to Parliament, a move that would pave the way for the collective action clauses to be included.

"There is no decision as to if and when" such a bill could be submitted, Kapsis told the Associated Press.

Another issue is whether the deal will fall under English or Greek jurisdiction — something that Kapsis said was still being negotiated.

"It is not a given that we will go under English law," he said in an interview on Athens 9.84 radio.