Bondholders demand loss limit in debt swap

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?.