CRUCIAL talks over a Greek debt write-down failed to reach a solution over 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 last year.
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" ?260 billion worth of debt via an exchange of old bonds for new bonds with lower rates of interest.
The agreement would have wiped ?100 billion worth of debt 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 by 2020.
Dr Shane Oliver, the chief economist at AMP Capital, said the local sharemarket would probably open flat today.
"European markets were flat-to-down-slightly last week, and the US share market was flat too, given the uncertainty around how these talks would go," he 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 ahead of company reporting season next week.
Greek Finance Minister Evangelos Venizelos wanted the deal finalised before euro zone finance ministers met in Brussels today, where they planned to discuss the aid package.
A deal on the write-down must be struck before Athens can get access to a ?130 billion aid package from the International Monetary Fund. The IMF loan is desperately needed to stop Greece from defaulting when ?14.5 billion worth of Greek bonds mature in March.
A spokesman for the Institute of International Finance said the talks had made "substantial" progress.
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.
But 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 the rate of interest they will pay".
Meanwhile, a draft law published by the European Union says banks may be allowed to include asset-backed securities in the liquid assets that regulators demand lenders hold in the event of a credit squeeze.
The securities are currently 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."
Frequently Asked Questions about this Article…
What went wrong in the recent Greek debt talks and why did they stall?
Talks between European officials and Greece’s private creditors stalled because creditors were asked to accept a larger-than-expected “haircut” and the parties couldn’t agree on the term to maturity and the interest rate that replacement bonds would pay. That disagreement stopped a deal from being finalised over the weekend.
What haircut had private creditors already agreed to for Greek debt restructuring?
Private creditors, represented by the Institute of International Finance (IIF), had previously agreed in October to take a 50% loss on the value of about €260 billion of Greek debt by exchanging old bonds for new ones with lower interest rates.
How would the proposed debt swap have helped Greece’s finances?
The proposed restructuring would have wiped about €100 billion from Greece’s roughly €360 billion debt pile and saved Greece around €4 billion a year in interest payments, helping its goal of reducing borrowings to about 120% of GDP by 2020.
What bond terms were the parties close to agreeing on before talks broke down?
The parties were nearing an agreement to swap old bonds for new securities with coupons averaging between 4% and 4.5%, but they failed to agree on how long the new bonds would mature and the final interest rate structure.
Why is a debt deal important for Greece to access IMF aid?
A deal on the write-down is a precondition for Athens to access a €130 billion aid package from the IMF. That loan is described as desperately needed to prevent default when about €14.5 billion of Greek bonds mature in March.
How did the stalled Greek talks affect sharemarkets and investor sentiment?
The uncertainty weighed on markets: European and US markets were flat-to-down, and analysts expected local sharemarkets to open flat-to-slightly down. Australian futures were pointing to about a 10-point fall as investors also considered the risk of more profit warnings ahead of reporting season.
What did the IIF and market participants say about progress in the negotiations?
An IIF spokesman said the talks had made "substantial" progress, even though they ultimately stalled. Market commentators were focused on upcoming meetings of euro-zone finance ministers in Brussels to see if a deal could be pushed through.
What change in EU banking rules was mentioned and how could it affect investors?
A draft EU law suggested banks may be allowed to include asset-backed securities as part of the liquid assets regulators require under rules like Basel III. Industry managers said this could boost demand for European asset-backed securities and bring banks back into the investor base, which may affect credit markets and investment opportunities.
Call 1300 880 160
Start a chat
Schedule a call
