Crunch looms for Greek debt

CRUCIAL talks over a Greek debt writedown failed to come to a conclusion at the weekend, leaving the sharemarket to open under a cloud of uncertainty today.

CRUCIAL talks over a Greek debt writedown failed to come to a conclusion at the weekend, leaving the sharemarket to open under a cloud of uncertainty today.

Talks between European officials and private creditors stalled after Greece's private creditors were asked to take a larger-than-expected "haircut" on the value of their bond holdings to offset a deeper than forecast recession in Greece.

The creditors, represented by the Institute of International Finance, had agreed in October to take a 50 per cent loss on the value of their holdings by "restructuring" a total of ?260 billion ($320 billion) in debt.

This would be done through an exchange of old bonds for new bonds with lower rates of interest.

This deal would have wiped ?100 billion from Greece's massive ?360 billion debt pile.

It would also have saved Greece ?4 billion a year in interest payments, essential if the country's borrowings are to fall to 120 per cent of gross domestic product by 2020.

But a weekend report in the Financial Times suggested bondholders were now being asked to take a loss of more than 70 per cent.

It quoted one banker as saying this was "a level that institutions may be unwilling to accept voluntarily".

The Greek Finance Minister, Evangelos Venizelos, wanted a deal finalised before euro zone finance ministers met today in Brussels, where they planned to discuss a second package of aid to help Greece.

A deal on the writedown must be struck before Athens can access a ?130 billion aid package from the International Monetary Fund.

The IMF loan is desperately needed to stop Greece defaulting when ?14.5 billion worth of Greek bonds mature on March 20. An IIF spokesman said the talks on a writedown had made "substantial" progress despite the report of a bigger writedown being sought for Greek creditors.

The parties were nearing an agreement under which old bonds would be swapped for new securities with coupons averaging between 4 per cent and 4.5 per cent.

The talks stalled when European officials and Greece's private creditors failed to agree on the term to maturity of the new replacement bonds and their rate of interest.

Shane Oliver, chief economist at AMP Capital, said the local sharemarket would probably open fairly steady today. "European markets were flat to down slightly last week and the US sharemarket was flat too," Dr Oliver said.

"Monday will be flat to down slightly and then we'll start to take our lead from the European finance ministers' meeting."

The Australian futures market is pointing to a 10-point fall at the opening of trade today while investors weigh up the prospect of more profit warnings before company reporting season next week.

Meanwhile, a draft law published by the European Union says banks may be allowed to include asset-backed securities in the liquid assets which regulators demand lenders hold in the event of a credit squeeze.

The securities at present are excluded as liquid assets in rules known as Basel III, making the debt less attractive to banks.

"It's very good news, very good news for European asset-backed securities, where demand has been dominated by a few clients, mostly in the US," a senior portfolio manager at Cairn Capital, Stefano Loreti, said.

"This development could help bring back European banks to the investor base."

On Friday, the Global Issues Group of the World Economic Forum, which begins in Davos in Switzerland this week, warned that while governments needed to stem financial contagion in Europe and restore confidence in financial institutions to end the sovereign-debt crisis and spur expansion, they should manage fiscal consolidation to promote rather than reduce growth prospects.

The Davos group's members include the International Monetary Fund, World Bank, World Trade Organisation and the heads of eight other multilateral and regional economic institutions.

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