NEGOTIATIONS over the fate of the Greek economy are at a critical stage after private bondholders refused to accept further losses on the face value of their Greek bonds.
Before a crucial meeting of European finance ministers last night, Charles Dallara, the managing director of the Institute of International Finance - the group representing private holders of Greek debt - said he was hopeful the European Union and International Monetary Fund would help avert a Greek default by agreeing to terms for private-sector involvement in a debt-swap deal.
But having agreed to a 50 per cent "haircut" on the value of about ?200 billion ($246.3 billion) of bond holdings, Mr Dallara said IIF members had made their "maximum" offer, without saying what it was.
"The elements now are in place for an historical voluntary private-sector involvement deal," Mr Dallara said. "It is a question now, really, of the broader reaction of the European official sector and, of course, of the IMF to this proposal."
A Greek debt-swap deal would mean private bondholders would exchange outstanding bonds for new ones in a bid to help reduce the country's borrowings to 120 per cent of gross domestic product by 2020.
But European officials and bondholders have not been able to agree on the interest rates and maturity of the new bonds, which would determine losses for investors.
At issue is the fact that the Greek economy was expected to shrink by about 6 per cent last year, according to the latest IMF estimates, compared with a forecast of 3.8 per cent made in June. Because of that, IMF and EU officials are said to be pushing for bondholders to accept lower rates of interest on their new bonds. An agreement is key to a ?130 billion financing package for Greece, which faces a ?14.5 billion bond payment on March 20.
Investors remained nervous yesterday. The S&P/ASX 200 fell 14.5 points, or 0.3 per cent, to 4225.1.
"It has made for a pretty tense Asian trading session," a market strategist at IG Markets, Stan Shamu, said in a statement. "However, despite some disappointment that no deal has materialised, there has been no real panic selling either."
A senior strategist at National Australia Bank, Emma Lawson, said currency markets oscillated early in the day but with financial markets in China, Hong Kong, Singapore, South Korea, Taiwan, Indonesia and Malaysia shut for the lunar new year holiday, they remained largely unaffected by the news.
"Currency markets aren't reacting very much," Ms Lawson said. "I think we need to see how hard the IIF are going to dig their heels in. They've told us the next move is down to the IMF and the IMF says bondholders need to take greater cuts."
With the World Economic Forum starting in Davos this week and European finance ministers debating a new fiscal compact for Greece, investors are likely to remain tuned to Europe.
"The market's just sitting, waiting to see what happens next," Ms Lawson said.
Last night, the dollar was trading at US104.86?.
Frequently Asked Questions about this Article…
What is the proposed Greek debt-swap deal and how would it affect private bondholders?
The debt-swap proposal would have private bondholders exchange existing Greek bonds for new bonds as part of a voluntary private-sector involvement to cut Greece’s debt. The aim is to reduce Greece’s borrowings to about 120% of GDP by 2020; the exact losses for bondholders depend on the interest rates and maturities of the new bonds.
What does a 50% "haircut" on Greek bonds mean for investors?
A 50% haircut means bondholders accepted cutting the face value of roughly €200 billion of Greek bonds by half. The Institute of International Finance (IIF) said its members had made their "maximum" offer after agreeing to that haircut, though further details were not disclosed in the article.
Who is Charles Dallara and what role does the IIF play in the negotiations?
Charles Dallara is the managing director of the Institute of International Finance (IIF), the group representing private holders of Greek debt. The IIF negotiates on behalf of private bondholders and presented offers intended to help avert a Greek default, while awaiting responses from the EU and IMF.
Why are interest rates and maturities of replacement bonds a sticking point in the deal?
Interest rates and maturities determine how much investors ultimately lose. European officials and bondholders have been unable to agree because the IMF and EU are pressing for lower interest on the new bonds—especially after IMF data showed Greece’s economy shrank more than previously forecast—so those terms directly affect investor losses.
How important is a debt-swap agreement to Greece’s broader financing package?
A deal is crucial: agreement with private bondholders is a key element of a proposed €130 billion financing package for Greece. Without it, Greece faces the risk of missing a large payment, including a €14.5 billion bond payment due on March 20 as noted in the article.
How did financial markets react while the Greek negotiations were ongoing?
Investors were nervous but there wasn’t widespread panic. The S&P/ASX 200 fell 14.5 points (about 0.3%) to 4225.1. Market strategists noted a tense trading session but said there had been no real panic selling.
Did currency markets move much on the Greek news, and why or why not?
Currency markets showed only limited reaction. A National Australia Bank strategist said currency markets oscillated early but were largely unaffected because major Asian markets — including China, Hong Kong, Singapore, South Korea, Taiwan, Indonesia and Malaysia — were closed for the Lunar New Year holiday.
What should everyday investors watch next in the Greek debt negotiations?
Investors should follow the IMF and European finance ministers’ responses, any formal acceptance of private-sector terms, and upcoming events such as the World Economic Forum in Davos. Keep an eye on market indicators (stock indices like the S&P/ASX 200 and currency moves) for immediate market reactions mentioned in the article.
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