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Greek debt default threat grows

Talks over Greece’s debt restructuring broke down on Friday, an unexpected blow that makes it increasingly likely that Athens will become the first government of a developed country in more than 60 years to suffer a full-scale default on its debt.

By Peter Spiegel in Brussels and Kerin Hope in Athens

Financial Times,

13 January, 2012

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

The International Monetary Fund, in particular, has concluded that bondholder losses must be increased significantly, or a second Greek bail-out would have to be bigger than the €130bn agreed in October.

“Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach,” said the statement, put out by Charles Dallara, managing director of the International Institute for Finance, and Jean Lemierre, of BNP Paribas, who have been negotiating on behalf of banks and other financial institutions.

“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 men said.

Despite the move for more time, the announcement comes perilously close to putting at risk a €14.4bn 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 that Greece would not have to repay the entire sum.

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

On Friday, Evangelos Venizelos, Greek finance minister said talks would resume in Athens on Wednesday and dismissed suggestions his government was headed to a disorderly default.

“I am certain we can bridge the differences,” Mr Venizelos told the Financial Times in his first newspaper interview since he took over the finance ministry in June.

“I remain strongly committed and confident. Rationality will prevail because this initiative is of common interest to Greece, its private creditors and for all its institutional partners.”

In October, Mr Dallara and European officials had 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 putting at risk attempts to make the deal voluntary among all private Greek bondholders.

IMF officials have insisted 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, published last month, said that Greek debt could be brought down to 120 per cent of gross domestic product by 2020 – the target agreed by eurozone leaders in October – through tough austerity and economic deregulation measures. But it warned: “A key assumption underpinning the sustainability result is that the [debt restructuring] operation achieves a near-universal participation rate”.

Since then, data for Greek growth and public finances have been worse than expected, suggesting that greater bail-out support is required.

Jacob Funk Kierkegaard at the Peterson Institute of International Economics in Washington said: “The IMF has said that either Greece needs 100 per cent … participation [from bondholders] or the euro area authorities have to make up the shortfall. The euro area now has to decide whether they want to pony up another €30bn or so or force a coercive restructuring”.

In addition, Mr Venizelos said that Greece would need €40bn to recapitalise its teetering banking sector, which could force European and IMF lenders to increase the bail-out even further. 

The October agreement earmarked only €30bn to shore up Greek banks, but Mr Venizelos said the August recapitalisation would need to be substantial to persuade Greek depositors to return their money; Greek depositors have pulled €65bn from banks – or about one-third of total deposits – over the past two years.

“We want to see a recovery of confidence, a change of psychology, so that deposits will return and liquidity will increase,” Mr Venizelos said.